And Then the Roof Caved In

Chapter 6

Complicity

 

 

 

There would have been no credit crisis and therefore no economic crisis if not for the complicity of the rating agencies.They were the oil that greased all the moving parts in the great machine Wall Street constructed to package up and sell U.S. subprime mortgages around the world. Their job was to protect investors from that machine. Instead they protected the profits they were making from it.

In our financial system, three companies known as rating agencies dominate the business of deciding how safe or unsafe a particular piece of debt is.Those companies are Moody’s Investors Service, Standard & Poor’s, and to a lesser extent, Fitch Ratings. Standard & Poor’s (S&P) is owned by the McGraw-Hill Company. Fitch is owned by France’s Fimilac. Moody’s is the only public company of the three and boasts the added credibility of having Warren Buffett among its largest investors.

Moody’s went public in September 2000, when it was spun off from its longtime parent Dun & Bradstreet at the behest of that company’s shareholders, who believed the separation would lead to better days for both. The company was founded in 1909 by John Moody when he published a manual entitled Analysis of Railroad Instruments, which introduced a system of opinions about the creditworthiness of railroad bonds. The business of judging creditworthiness evolved from there. By 1914, Moody’s Investors Service was incorporated with the goal of providing a rating on virtually any bond, whether corporate ...