Last night, we looked at the first part of the special investigation from Bloomberg — and noted its a must read!
Here is part II:
In August 2004, Moody’s Corp. unveiled a new credit-rating model that Wall Street banks used to sow the seeds of their own demise. The formula allowed securities firms to sell more top-rated, subprime mortgage-backed bonds than ever before.
A week later, Standard & Poor’s moved to revise its own methods. An S&P executive urged colleagues to adjust rating requirements for securities backed by commercial properties because of the "threat of losing deals.”
The world’s two largest bond-analysis providers repeatedly eased their standards as they pursued profits from structured investment pools sold by their clients, according to company documents, e-mails and interviews with more than 50 Wall Street professionals. It amounted to a "market-share war where criteria were relaxed,” says former S&P Managing Director Richard Gugliada.
"I knew it was wrong at the time,” says Gugliada, 46, who retired from the McGraw-Hill Cos. subsidiary in 2006 and was interviewed in May near his home in Staten Island, New York. "It was either that or skip the business. That wasn’t my mandate. My mandate was to find a way. Find the way.”
Wall Street underwrote $3.2 trillion of loans to homebuyers with bad credit and undocumented incomes from 2002 to 2007. Investment banks packaged much of that debt into investment pools that won AAA ratings, the gold standard, from New York-based Moody’s and S&P. Flawed grades on securities that later turned to junk now lie at the root of the worst financial crisis since the Great Depression, says economist Joseph Stiglitz.
‘Would Have Stopped Flow’: "Without these AAA ratings, that would have stopped the flow of money,” says Stiglitz, 65, a professor at Columbia University in New York who won the Nobel Prize in 2001 for his analysis of markets with asymmetric information. S&P and Moody’s "were trying to please clients,” he said. "You not only grade a company but tell it how to get the grade it wants.”
Go read the entire piece . . .
‘Race to Bottom’ at Moody’s, S&P Secured Subprime’s Boom, Bust
Elliot Blair Smith
Bloomberg, Sept. 25 2008