|  | | 2007 News and Press Releases | | |
HEADLINE NEWS:
Analysts Late to the Alarm, Fallout From Subprime Crisis Casts Scrutiny on Ratings
Tomoeh Murakami Tse
washingtonpost.com. December 13, 2007
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EXCERPT: Throughout 2006, T. Rowe Price analyst Susan Troll watched in horror as one risky mortgage deal after another hit the market. She became alarmed by a widening trend: mortgage lenders issuing home loans of poor quality that were then packaged and sold by Wall Street investment banks to investors worldwide. Finally, she could stand it no longer. In e-mails and meetings with money managers, Troll urged T. Rowe Price to sell its portfolio of subprime mortgage securities. "I just was amazed at how quickly these deals were getting done when you see constant deterioration in credit quality," she said. "I just said, 'It can't keep going up at this rate.' It just didn't make sense." T. Rowe sold some of its subprime assets in December 2006 and cleared its books of them by early February -- well before the summer's credit crisis erased the market for these types of securities. Troll's warnings won kudos from James Kennedy, chief executive of the Baltimore firm, which has been posting impressive quarterly results. Troll's actions were hardly the norm. Plenty of analysts did not sound the alarm on the subprime mess. The ensuing turmoil in the financial system has wiped out billions of dollars of shareholder equity at banks, investment firms, mortgage lenders and bond insurance companies. Five years after high-profile Wall Street analysts were accused of pocketing millions for promoting shoddy companies, analysts are once again in the spotlight for their conduct. Should analysts have seen the meltdown coming? Why didn't they? Did conflict of interest play a role? There has been much finger-pointing, but no conclusions. One main issue, experts note, is that the complex alphabet soup of debt securities that have experienced explosive growth in recent years and are at the heart of the credit crunch are extremely hard to evaluate. That was the case, they say, even for some credit analysts whose job is to make calls on debt instruments -- not to mention for equity analysts who typically look at a company's earnings relative to stock price, cash flow and other factors. |
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