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The Negligence of Credit Rating Agencies

On October 22, 2008 the Congressional Committee on Oversight and Government Reform held a hearing on “Credit Rating Agencies and the Financial Crisis. Chairman Henry Waxman said that the story of the “credit rating agencies was a story of colossal failure” in the subprime mortgage debacle by rating debt obligations with incredibly high ratings at a time when the ability of the issuer to make timely payments was highly doubtful. He accused the credit rating agencies (the leading credit rating agencies are Standard & Poor’s, Moody’s, and Fitch) of breaking their trust with millions of investors.

During the Committee hearing, emails were released that demonstrated credit rating agency analysts were well aware of the fragile nature of many of the loans. Several people testified highlighting how the credit rating agencies are compromised by the issuers since that is who pays them. And that’s the rub. Where do credit rating agencies get their money? from the people who want the agencies to rate their bonds, RMBS, CDOs, and SIVs. Hence if the issuer does not like the rating, the issuer will walk across the street to another credit rating agency.

Now a year later, legislation is being considered to regulate these credit rating agencies. House Financial Services Committee Chairman Barney Frank and Paul Kanjorski, Chairman of the Subcommittee on Credit Markets have draft legislation to create the Enhanced Accountability and Transparency in Credit Rating Agencies Act. Now to get it passed….
The best website to read about the corruption of the credit rating agencies is the McClatchy site: I have made it my homepage!


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