|  | | 2007 News and Press Releases | | |
HEADLINE NEWS:
Let the Blame Begin, Everyone played some role—the Street, lenders, ratings agencies, hedge funds, even homeowners. Where does responsibility lie?
Roben Farzad
BusinessWeek. July 27, 2007
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EXCERPT: Who's responsible for the subprime mess? Not us, say the lenders that made risky mortgage loans to consumers. Similar denials come from the Wall Street firms that bought, packaged, and sold the loans to investors; the bond-ratings agencies that said those investments were safer than they turned out to be; and the hedge funds that gorged on them. As the allegations fly, various players are busy issuing disclaimers and pointing fingers at everyone else. At the center of the controversy are the big bond-rating agencies—Moody's Investors Service (MCO), Fitch Ratings, and Standard & Poor's, which, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP). These firms are paid by companies to grade their bonds, and investors use those grades when deciding whether or not to invest. The two biggest agencies, S&P and Moody's, have also profited handsomely in recent years by rating collateralized debt obligations (CDOs), or complicated bonds, backed by tens or hundreds of loans and other kinds of debt, that are structured in a way to offer investors higher yields than similarly rated corporate bonds. Sales of CDOs have quintupled since 2001, though neither Moody's nor S&P break out the revenues they receive from rating them. Without the agencies' stamp of approval, many big investors like pension funds and university endowments wouldn't be allowed to buy CDOs. The market, for all practical purposes, wouldn't exist. … Enter the second group under fire: the fast-trading hedge funds that bought up the riskiest mortgage-backed securities during the housing boom. Stracke notes that "very well-paid and intelligent asset managers wanted new things to buy" and were perfectly happy to buy CDOs larded with subprime loans, even with leverage. |
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