A Smoking Gun on Corruption of Ratings Agencies: The Bankers Friends’ Scam

In General Interest by Jonathan Tasini2 Comments

Among the myths promoted by the traditional press–myths that hurt the entire country–is the “independence” of the ratings agencies. And that myth was one of the underpinnings of the financial crisis–the ratings agencies gave positive ratings to the crummy debt securities that were at the heart of what led to millions of people losing their jobs. Now, a smoking gun has emerged to prove what a scam it was.

Per Gretchen Morgenson, one of the few denizens of the traditional press who questioned the worthiness of the securities, in the New York Times:

For years, the ratings agencies have contended that the grades they assign debt securities are independent opinions and therefore entitled to First Amendment protections, like those afforded journalists. But newly released documents in a class-action case in Federal District Court in Manhattan cast doubt on the independence of the two largest agencies, Moody’s Investors Service and Standard & Poor’s, in their work with a Wall Street firm on a debt deal that went bad as the credit crisis began[emphasis added].


When Cheyne issued its various securities in 2005, Moody’s and S.& P. rated them all investment grade. Even though Cheyne’s portfolio was bulging with residential mortgage securities, some of its debt received the agencies’ highest ratings, a grade equal to that assigned to United States Treasury securities. About two years later, as mortgage losses began to balloon, both agencies downgraded Cheyne’s debt below investment grade, to what is known as junk


And what happened when a top rating was at risk?:

For example, when the primary analyst at S.& P. notified Morgan Stanley that some of the Cheyne securities would most likely receive a BBB rating, not the A grade that the firm had wanted, the agency received a blistering e-mail from a Morgan Stanley executive. S.& P. subsequently raised the grade to A.

And when a Morgan Stanley colleague asked for information about the Cheyne deal, Rany Moubarak, an analyst at Morgan Stanley on the deal, wrote in an e-mail: “I attach the Moody’s NIR (that we ended up writing)” referring to the new issue report published by Moody’s in August 2005.[emphasis added]

The court filings also demonstrate a lack of methodology for analyzing the Cheyne debt. For example, in an e-mail before the deal was sold, S.& P.’s lead analyst wrote to a colleague: “I had difficulties explaining ‘HOW’ we got to those numbers since there is no science behind it. The documents show that the lead analyst at Moody’s noted there was “no actual data backing the current model assumptions” for segments of the Cheyne deal.[emphasis added]

This is really not a surprise. It is startling, given their role in the financial crisis, that the ratings agencies are even taken seriously anymore. I pointed this out when

Moody’s threatened to downgrade the U.S. credit rating–the same Moody’s where the people go to work because,“Guys who can’t get a job on Wall Street get a job at Moody’s”

Which reminds me: whatever happened to the Justice Department’s investigation of Standard and Poor’s for improperly rating securities by the bushels?

Understand this, as the bottom line: the ratings agencies are about making money. They are not independent.