[T]he e-mail messages you should be focusing on are the ones from employees at the credit rating agencies, which bestowed AAA ratings on hundreds of billions of dollars’ worth of dubious assets, nearly all of which have since turned out to be toxic waste. And no, that’s not hyperbole: of AAA-rated subprime-mortgage-backed securities issued in 2006, 93 percent — 93 percent! — have now been downgraded to junk status.
What those e-mails reveal is a deeply corrupt system.
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The Senate subcommittee has focused its investigations on the two biggest credit rating agencies, Moody’s and Standard & Poor’s; what it has found confirms our worst suspicions. In one e-mail message, an S.& P. employee explains that a meeting is necessary to “discuss adjusting criteria” for assessing housing-backed securities “because of the ongoing threat of losing deals.” Another message complains of having to use resources “to massage the sub-prime and alt-A numbers to preserve market share.”
We generally protect credit rating agencies for liability, on the theory that a credit rating is merely a statement of opnion intended to show the percentage of bonds with the rating that will default, not whether a bond will or will not default in a partiuclar instance. But, that protection assumes that the credit reporting agencie are worthwhile as a central aspect of the bond market, and as an integrated part of the regulatory structure, because we can trust them to act in good faith.
But, when credit rating agencies don't act in good faith, as they failed to in the financial crisis, the entire bond market falls apart based upon the bad decision making that takes place based upon their misleading information.