The unpublished doubts of mortgage-bond graders
From Times staff writer Walter Hamilton:
Long after Internet stocks crashed eight years ago, investors learned that some of the stock analysts who had heavily touted tech companies had privately badmouthed them, including in e-mails.
A version of that unsavory behavior appears to have taken place behind the scenes of the subprime mortgage boom, according to a report Tuesday by the Securities and Exchange Commission.
The report indicates that as the subprime bubble inflated in recent years, some analysts at the three major credit-rating firms -- Standard & Poor's, Moody's Investors Service and Fitch Ratings -- questioned the accuracy of the buoyant ratings their firms were assigning to mortgage-backed bonds.
The analysts seemed to suggest that they couldn’t do thorough assessments because they were snowed under by the avalanche of increasingly complex securities that they had to review as their firms tried to cash in on the housing boom.
In an April 2007 e-mail, an analyst wrote that her firm’s evaluation methodology did not capture even half of the risk of a certain deal, but added that “it could be structured by cows and we would rate it,” the SEC report says.
In a December 2006 e-mail, another analyst at the same firm wrote that the market for arcane securities known as collateralized-debt obligations had become a “monster.”
“Let’s hope we are all wealthy and retired by the time this house of cards falters,” the analyst wrote. The SEC didn’t disclose which firm employed those analysts.
SEC Chairman Christopher Cox said at a press conference in Washington that the study uncovered "serious shortcomings" at the three firms. "When there were not enough staff to do the job right, the firms sometimes cut corners."
The credit-rating firms gauged the credit-worthiness of the thousands of bonds and other securities that Wall Street investment banks were creating from pools of subprime mortgages. Banks wanted top ratings so that pension funds and other institutional investors would buy the bonds from them.
The positive ratings helped super-charge the housing bubble in the boom years. Since the bubble burst and the true risks of the bonds have become evident, furious downgrades by the rating firms over the last year have aggravated the housing and credit-market busts.
Overall, the SEC report found that the firms mishandled conflicts of interest and didn’t always follow internal procedures in assigning ratings.
Unrealistically lofty ratings from the credit graders have long been cited as one of the causes of the subprime catastrophe. The SEC report just underscores that -- although it's of little help now to homeowners stuck with bad mortgages or to the U.S. economy as it grapples with the fallout.
Photo: SEC Chairman Christopher Cox. Brendan Smialowski/Bloomberg News