How Ratings Agencies Built the Foundation of the Financial Crisis

It’s been clear for a long time that the decimation of the U.S. economy couldn’t have occurred without the ratings agencies that were charged with determining how risky all of those mortgage-backed investment products might be.  And, since it was very hard to believe that agencies which had successfully performed this role for decades had simply suddenly forgotten how to do their jobs, many people have long suspected elements of fraud and collusion.

So, in a sense, Matt Taibbi’s June 19 article, “The Last Mystery of the Financial Crisis” (July 4-18 issue of Rolling Stone), doesn’t come as a big surprise.

In another sense, it remains jarring to be confronted with the widespread, blatant corruption that created financial chaos in the U.S. and beyond.

Culling from documents produced during a pair of investor lawsuits settled in April, Taibbi shares direct quotes from executives hoping they’re wealthy and retired before the house of cards they’re building comes tumbling down, and also from a few players who objected along the way, lamenting the loss of any reliable system and repeatedly pointing out that there was no basis for the ratings they were issuing.

And, despite the best efforts of a handful of government officials such as Michigan Senator Carl Levin, the system that allowed–even encouraged–the ratings agencies to sell ratings at the expense of investors, the public and the international economy is still in place. In fact, the agencies are thriving: Moody’s and Standard & Poor both posted significant profits in 2012; in Moody’s case, well in excess of $1 billion.  And, stock prices for both soared when the investor suits settled.

The agencies, of course, deny any fraud and assert that they made a sincere, analysis-based effort at accurate ratings.  The mountain of evidence to the contrary aside, that’s not much of a defense.  As Taibbi points out, even if they truly were just that incompetent, that’s reason enough that they should be out of business.