Lisa Simpson
Jun 16,2010
In: Foreclosure

Did the Credit Rating Agencies Trigger the Financial Crisis?

The CEO of Moody’s, Raymond McDaniel has admitted that the erroneous ratings of the investments connected with mortgaged houses led to deep disappointments. He warned that in future the investors should not depend on the ratings while trading in securities. He said, “Moody’s is certainly not satisfied with the performance of these ratings.” However steps are being taken to better the process of rating. He made these statements while testifying before the Financial Crisis Inquiry Commission.

McDaniel explained that the ratings should be used like a tool but not for buying, selling or holding recommendation.

McDaniel is scheduled to testify together with billionaire Warren Buffet – a king among investors in front of the FCIC. Buffett is the chairperson of Berkshire Hathaway and also its CEO. He is the biggest shareholder of Moody’s.

The top three rating agencies – Moody’s, Standard & Poor and Fitch have come in for sharp criticism for giving high ratings to complicated investments having the backing of risky mortgages and similar such assets. When the owners of residential houses began to default on the mortgages these rating entities downgraded billions of investments at one go. This kicked off the financial panic.

The legislators have pointed an accusing finger at the mortgage industry for conflicting interests. These agencies were paid by the very firms whose investments they are supposed to rate.

Buffett has been subpoenaed by FCIC to testify regarding the credit ratings and their credibility as well as investments that were made founded on these ratings.

Although Buffett has interest in Moody he said that he never depended on these credit ratings while taking decisions regarding investments. He made his individual judgments on the firms.

The first subpoena was made to Moody in April by FCIC. It was stated that the firm had failed to produce the required documents. Phil Angelides, the chairperson of FCIC said the firm had begun to comply after having received the subpoena and is now responding to the request.

In the hearing the panel will look deep into the matter as to how the agencies decide on rating and how far these ratings led to the financial crisis and if the business model of these agencies is partially to be blamed for what happened.

One deal that could be focused on is Goldman Sachs transaction named Abacus. It is a complicated investment linked to mortgage securities that later suddenly dropped in value. Moody’s as well as Standard & Poor gave it a triple A rating – the best they offer as regards safety.

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