The Wall Street Journal reports tonight that the Securities and Exchange Commission intends to pursue an inquiry into the role the ratings agencies played in fueling the subprime mortgage boom — and whether their roles are independent enough from the Wall Street firms issuing ABS/MBS. From the story, some excerpts:
The Securities and Exchange Commission and state attorneys general in New York and Ohio have begun to examine how the ratings firms evaluated subprime-mortgage-backed securities that grew into a trillion-dollar market … Critics point out that ratings firms’ financial fortunes are closely tied to the volume of securities deals — and that higher ratings often spur deals on by making securities easier to sell. In recent years, mortgage-backed securities have become a major profit driver at Moody’s. From 2003 to 2006, the growth in the mortgage market helped Moody’s stock price triple, while its profit climbed 27% a year on average. The firm’s CEO, Raymond McDaniel, received a compensation package of $8.2 million last year, about double his pay package in 2005 and triple what his predecessor made in 2000. S&P, as a unit of a larger public company, isn’t required to release compensation figures … “We’re going in to look at the conflicts of interest, both in how they are paid and in their standards for rating,” said Erik Sirri, director of the SEC’s division of market regulation, after testifying on Capitol Hill on Wednesday.
Subscribers can read the full article. I’d note here that on August 7, Moody’s announced a formal restructuring effort which separated its ratings business from all other areas of the company, including its analytics, sales and marketing organizations. At the time, Moody’s CEO Raymond W. McDaniel Jr. characterized the move as an attempt to “better meet expectations of our customers, regulatory oversight authorities and other constituencies.” McDaniel also said the reorganization “reaffirms Moody’s commitment to providing objective, independent and rigorous ratings opinions.”
