|  | | 2008 News and Press Releases | | |
HEADLINE NEWS:
The Subprime Bust In Microcosm: The Saga Of A Failed Mortgage Package
Roger Lowenstein
International Herald Tribune. April 25, 2008
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EXCERPT: Over the last decade, Moody's and its two principal competitors, Standard & Poor's and Fitch, played this game to perfection - putting gold seals on mortgage securities that investors swept up with increasing élan. For the rating agencies, profits surged. By providing the mortgage industry with an entrée to Wall Street, the agencies also transformed what had been a sleepy corner of finance, and mortgage banks started writing new loans at a much quicker pace. And volume jumped: In 2006, it topped $2.5 trillion, with many mortgages issued to subprime borrowers. Almost all of those subprime loans ended up in securitized pools sold to Wall Street. But who was passing judgment on the quality of the mortgages, on the equity behind them, and on myriad other investment considerations? Certainly not the investors. They relied on a credit rating. Thus the agencies became the de facto watchdog over the mortgage industry. In the wake of the housing collapse, Congress will explore why the industry failed and whether it should be revamped (hearings in the Senate Banking Committee will begin this month). Two key questions are whether the credit agencies - which benefit from a unique series of government charters - enjoy too much official protection, and whether their judgment was tainted. Moody's and S&P have announced reforms already, but they reject the notion that they should have been more vigilant - instead, they blame the mortgage holders who have defaulted, many of whom lied to obtain loans. Arthur Levitt, the former chairman of the Securities and Exchange Commission, charges that "a conflict of interest is distorting the rating agencies' judgment." Frank Partnoy, a professor at the University of San Diego School of Law who has written extensively about the credit-rating industry, seconds that verdict. Thanks to the industry's close relationship with the banks whose securities it rates, he says, the agencies have behaved less like gatekeepers than gate openers. |
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