Sleeping With the Enemy -- Rating Agency Conflicts Surface

With the Securities and Exchange Commission bearing down on Goldman Sachs for alleged fraud and the Financial Crisis Inquiry Commission gathering its own head of populist steam, another probe about to wind down in the Senate has now formally fingered a chief culprit in the crash: credit rating agencies.

"Had credit-rating agencies been more careful in issuing ratings … we maybe would have averted the crisis," said Sen. Carl Levin, D-Mich., chairman of the Senate's Permanent Subcommittee on Investigations, at a recent hearing. "But they did not. Without credit ratings, Wall Street would have had a much harder time selling securities because they wouldn't have been considered safe."

VIDEO: The SEC charges investment giant Goldman Sachs with fraud.
Wall Street Awaits Criminal Probes

The Senate subcommittee was set today to wrap up an 18-month probe into the crash of 2008 by grilling some Goldman executives in what is sure to be a heated and closely watched session.

However, while there's plenty of blame to spread around, from the big investment banks like Goldman to loan originators like Countrywide, Levin has laid blame squarely on the doorstep of the top three rating agencies, Moody's Investors Service, Standard & Poor's and Fitch Ratings.

For the Love of Money

The poisoning of the financial system, according to Levin, happened in large measure because the rating agencies, led astray by greed, got into bed with the Wall Street banks.

"The subcommittee investigation found that ... credit-rating agencies allowed Wall Street to impact their analysis, their independence, and their reputation for reliability," Levin said Friday. "And they did it for the money."

Meanwhile, as if the ratings agencies did not have enough heat coming down on them, the Financial Crisis Inquiry Commission last week issued its first subpoena, to Moody's.

It was not clear what information Moody's is being pushed to turn over; nor is it clear why the firm was reluctant to do so without the FCIC having to use the power of subpoena.

Michael Adler, a Moody's spokesman, said Monday that "Moody's has and continues to devote substantial resources to producing documents and making our people available to the FCIC, our regulators, State Attorneys General, Congress and many others tasked with understanding the financial crisis and the role of the rating agencies. We continue to work to provide useful and appropriate responses to these inquiries."

Lawsuits Filed, Emails Unearthed

Intensifying scrutiny of the ratings agencies comes as lawmakers grapple with an overall package of financial reform legislation, a giant grab bag of proposals, including a measure that would potentially make it easier for investors to sue the ratings agencies.

Already ratings agencies have been slapped with a number of negligence lawsuits, including ones filed by Connecticut Attorney General Richard Blumenthal and the California Public Employees Retirement System.

Levin's probe has uncovered new evidence, including emails, pointing to some questionable practices within the rating agencies during the credit bubble's formation, primarily the issuing of coveted Triple-A ratings to derivative securities, such as collateralized debt obligations, that were laced with toxic subprime mortgages.

A slew of particularly damning emails sent by ratings agency executives reveal a culture in which analysts were often at odds with revenue generation agendas.

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