The Ratings Scam

Gretchen Morgenson in yesterday’s Times keeps her eye on the ball with a look at one of the biggest scandals of the last decade, the ratings-agency debacle.

The paper gave it very nice display with multiple columns above the fold on page one. It’s space this story deserves because these ratings are at the heart of the problems that led to the collapse. They gave creampuff ratings to subprime securities that never should have been above junk status. Why’d they do that? The Times’s lede:

The housing mania was in full swing in 2005 when analysts at Moody’s Investors Service, the nation’s oldest and most prestigious credit-rating agency, were pressured to go back to the drawing board.

Moody’s, which judges the quality of debt that corporations and banks issue to raise money, had just graded a pool of securities underwritten by Countrywide Financial, the nation’s largest mortgage lender. But Countrywide complained that the assessment was too tough.

The next day, Moody’s changed its rating, even though no new and significant information had come to light, according to two people briefed on the change who requested anonymity to preserve their professional relationships.

The story has some other new stuff, like this:

Reversals like this have enraged investors. Internal e-mail messages disclosed by Congress in October, for example, recounted a July 2007 conversation Moody’s had with an irate customer at Pimco, a major money management firm.

“He feels that Moody’s has a powerful control over Wall Street but is frustrated that Moody’s doesn’t stand up to Wall Street,” the e-mail stated. “They are disappointed that in this case Moody’s has ‘toed the line. Someone up there just wasn’t on top of it,’ he said.”

But it’s mainly an explainer and history of the problem. It’s good that the Times is keeping this critical story on the front burner.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.