Bloomberg News Investigates: How Ratings Brought Down Wall Street (Part 1)


An exclusive two-part BLOOMBERG NEWS report investigates how flawed AAA ratings on mortgage-backed securities that turned to junk now lie at the root of the world financial system’s biggest crisis since the Great Depression. The BLOOMBERG NEWS report shows how — driven by competition for fees and market share — rating companies Moody’s and Standard & Poor’s issued top ratings on debt pools that included $3.2 trillion of loans to homebuyers with inferior credit between 2002 and 2007. Without those AAA ratings, the report shows, 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 a $700 billion Wall Street bailout.


On knowing that it was wrong:

“I refused to go along with some of this stuff, and how they got around it, I don’t know,” says Frank Raiter, 61, a former S&P managing director whose business unit rated 85 percent of mortgage deals at the time. “They thought they had discovered a machine for making money that would spread the risks so far that nobody would ever get hurt.”

On turning a blind eye to the risks:

“We knew the delinquencies were bad,” Raiter says. “The fact was, if we could have hired a supreme being to tell us exactly what the loss was on a loan, they wouldn’t have hired him because the Street wasn’t going to pay us extra money to know that.”

“The part that became the most aggravating –personally irritating — is that CDO guys everywhere didn’t want to know fundamental credit analysis; they didn’t want to know from being in touch with the underlying asset,” says Mark Adelson, 48, who quit Moody’s in January 2001 after being reassigned out of the residential mortgage-backed securities business. “There is no substitute for fundamental credit analysis.”

“There was the self-delusion, which hit not just rating agencies but everybody, in the fact that the mortgage market had never, ever, had any problems, and nobody thought it ever would,” says Richard Gugliada, 46, S&P’s global ratings chief for CDOs until 2005.

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