Economy: Senate to Ask Moody's Chief Why Bad Bonds Got Good Ratings

Finally they're getting to the people most to blame for the Great Recession.

On Friday, Moody's CEO Raymond McDaniel Jr. will face the Senate Permanent Subcommittee on Investigations, which is looking into the role the credit-rating agencies played in the nation's worst financial crisis since the Great Depression. The agencies rate the quality of financial products such as bonds and serve as guides trusted by investors. Many bonds they rated as top-quality in the recent crisis turned out to be junk.

McDaniel has yet to face the kind of congressional grilling already suffered by bank executives. However, an earlier hearing revealed a transcript in which McDaniel told his board of directors that his firm was constantly pressured to inflate ratings — and that sometimes Moody's "drank the Kool-Aid."

The ratings agencies are under attack on many fronts. Legislation to revamp financial regulations threatens to leave them more open to lawsuits for bad ratings, although not as open as consumer advocates hoped. They already face class-action suits from investors who lost money when top-rated bonds turned out not to be.

In addition, on Monday California Attorney General Jerry Brown brought court action trying to force Moody's to answer questions raised in a subpoena he issued seven months ago.

"The ratings are the linchpin of the entire financial meltdown. Without the ratings, the toxic assets could never have been sold," Brown, a Democratic candidate for governor in California, told McClatchy in an interview. [emphasis added]

Brown wants details about who developed the methodology for the rating of complex securities, and how far up the chain of command these decisions flowed. What most irks him is that Wall Street actors refuse to accept responsibility.

When Goldman Sachs Chief Executive Lloyd Blankfein recently testified before the congressionally mandated Financial Crisis Inquiry Commission, which is looking into the causes of the financial crisis, he suggested that Wall Street banks were at the mercy of the ratings agencies.

However, in a McClatchy investigation late last year, former Moody's officials recounted how Wall Street investment powers like Goldman played the three major ratings agencies off each other to get the ratings they needed to attract investors.

The carrot for the ratings agencies was a big reward, $1 million or more, for providing an investment grade to a complex deal.

Officials who oversaw the process of giving top ratings to some of the worst deals were given top executive suites and jobs heading regulatory affairs and compliance.

During this era, former Moody's executives said, ratings quality eroded as analysts were under intense pressure from Clarkson and McDaniel to maintain market share and a "business-friendly" environment.

See Senate to Ask Moody's Chief Why Bad Bonds Got Good Ratings Read More: Http://Www.Mcclatchydc.Com/2010/04/20/92540/Senate-to-Ask-Moodys-Chief-Why.Html#Ixzz0lq6kqzyb by Kevin G. Hall, April 20, 2010.