Angry lawmakers from both parties assailed the top dogs of the big three credit rating companies Wednesday morning, assigning severe blame for the financial crisis on their firms' failure to assess the risk of trillions in subprime-mortgage related investments.
"You're the gatekeepers, you're the guys," chided a visibly frustrated Rep. Elijah Cummings, D-Md. "You're the ones who make all the money. That's why you're there. Now we face a situation where we've got a house of cards that has fallen, and here we are trying to resurrect it."
"The story of the credit rating agencies is a story of colossal failure," Rep. Henry Waxman, D-Calif., chair of the House Oversight and Government Reform Committee told the men who appeared before his committee this morning. "The result is that our entire financial system is now at risk."
The top executives – Moody's Corporation CEO Raymond W. McDaniel, Standard & Poor's president Deven Sharma, and Fitch Ratings' president and CEO Stephen Joynt – said in prepared statements that the meltdown of mortgage-backed securities was "unanticipated" and "unprecedented."
"It's clear greed led to not just, 'see no evil, hear no evil,' but 'report no evil,'" charged Rep. Mark Souder, R-Ind. "I believe there is possible legal culpability."
Rep. Dennis Kucinich, D-Ohio, agreed, calling the situation "criminal."
Rep. Chris Shays, R-Conn., charged the firms, which took fees from the investment banks which were packaging and selling the mortgage-backed securities they were rating so highly, had "sold their independence to the highest bidder."
Confidential documents obtained by Waxman's investigators show that the firms' executives anticipated much of what has happened, and were aware that their ratings were quite possibly shaky, according to the chairman.
"It could be structured by cows and we would rate it," one Standard & Poor's employee wrote in a company email cited by Waxman. "Let's hope we are all wealthy and retired by the time this house of cards falters," wrote another in an email obtained by Waxman's committee.
As Moody's CEO McDaniel explained in an October 2007 presentation obtained by Waxman's staff, shaky ratings came because few of the players – investors, banks or the firms which issued the securities – truly want an accurate assessment of an investment, if it isn't going to be good news.
"Ratings quality has surprisingly few friends," he observed. "I should restate the public comments I've made previously, which is that our ratings are not influenced by commercial considerations," McDaniel said Wednesday when asked by Rep. Carolyn Maloney, D-N.Y., about the presentation. "Our ratings are on the basis of our best opipino based on the available information at the time."
"But that's not what you said to your board members," Maloney said.
"It's not inconsistent with what I said to our board members," McDaniel insisted.
"It is hard for me to read this document and believe that you believed what you were saying in public," Maloney told the CEO.
At all three ratings firms, profits in recent years have been among the fattest on Wall Street, Waxman is expected to note. One firm, Moody's, rang up profit margins three to four times those of Exxon Mobil Corp. while assuring investors that complex mortgage-backed investments were safer bets than they really were, according to Bloomberg News.