Ordinary Gweilo

Today’s SCMP has a lengthy Bloomberg story about the credit-rating weasels – Bringing Down Wall Street as Ratings Let Loose Subprime Scourge by Elliot Blair Smith:

“I view the ratings agencies as one of the key culprits,” says Joseph Stiglitz, 65, the Nobel laureate economist at Columbia University in New York. “They were the party that performed that alchemy that converted the securities from F-rated to A-rated. The banks could not have done what they did without the complicity of the ratings agencies.”

Driven by competition for fees and market share, the New York-based companies stamped out top ratings on debt pools that included $3.2 trillion of loans to homebuyers with bad credit and undocumented incomes between 2002 and 2007. As subprime borrowers defaulted, the companies have downgraded more than three-quarters of the structured investment pools known as collateralized debt obligations issued in the last two years and rated AAA.

Without those AAA ratings, the gold standard for debt, banks, insurance companies and pension funds wouldn’t have bought the products. Bank writedowns and losses on the investments totaling $523.3 billion led to the collapse or disappearance of Bear Stearns, Lehman Brothers and Merrill Lynch and compelled the Bush administration to propose buying $700 billion of bad debt from distressed financial institutions.

Honestly, what is the point of having credit-rating agencies if they do this kind of stuff?

The second part of the Bloomberg story is here:

The world’s two largest bond-analysis providers repeatedly eased their standards as they pursued profits from structured investment pools sold by their clients, according to company documents, e-mails and interviews with more than 50 Wall Street professionals. It amounted to a “market-share war where criteria were relaxed,” says former S&P Managing Director Richard Gugliada.

“I knew it was wrong at the time,” says Gugliada, 46, who retired from the McGraw-Hill Cos. subsidiary in 2006 and was interviewed in May near his home in Staten Island, New York. “It was either that or skip the business. That wasn’t my mandate. My mandate was to find a way. Find the way.”