Credit Agencies Deny Inflating Ratings to Beat Rivals, Senate Told
By Stephen Foley in New York
The two biggest credit rating agencies denied that they gave inflated ratings to sub-prime mortgage debt and other discredited bonds in order to attract more lucrative business from Wall Street banks.
The defence of their agencies' role in the credit crisis came as executives were hauled over the coals by US lawmakers on Capitol Hill, who said the agencies were riddled with conflicts of interest and should shoulder much of the blame for inflating a bubble in the credit markets.
Executives from Standard & Poor's and from Moody's appeared yesterday before the powerful Senate banking committee, one of several bodies investigating the rating agencies' role as arbiters of the creditworthiness of the mortgage-backed bonds created by Wall Street banks in record numbers.
Home loans taken out by low-income Americans have been parcelled up and used to back exotic new debt instruments, many of which were given credit ratings equivalent to US government bonds - suggesting they were practically guaranteed never to default. As millions of borrowers got into arrears, however, the bonds have all collapsed in value, causing global disruption.
At the heart of the controversy is the fact that it is the Wall Street banks that pay the agencies to rate the new products. One after another, Senators accused the agencies of giving artificially high ratings to ensure that the business did not go to their rivals.
Senator Jim Bunning, a Republican from Kentucky, described the process as "like a movie studio paying a critic to review a movie and then using a quote from his review in the commercials". …