The Barnyard Ethics of Rating Agencies

Barry Ritholtz at The Big Picture has an astounding followup to Matthew Blake’s coverage of Congress tearing into the rating agencies on Wednesday. As Matthew pointed out, lawmakers got into some unusually tough questioning of the CEOs of the agencies, which have come under heavy criticism for giving their stamps of approval to risky subprime mortgage-backed securities.

Among the tidbits from the dump of documents at the hearing was this following IM exchange between two analysts for Standard & Poor’s, Ritholtz notes:

Rahul Dilip Shah: btw: that deal is ridiculous

Shannon Mooney: I know right … model def does not capture half of the risk

Rahul Dilip Shah: we should not be rating it

Shannon Mooney: we rate every deal

Shannon Mooney: it could be structured by cows and we would rate it

Hmm. A little acknowledgement there, perhaps, that the agency knew things were a little off with all those high-risk deals making everyone so much money?

Not from S&P President Deven Sharma, who, as Ritholtz explains, told the committee this:

S&P is not alone in having been taken by surprise by the extreme decline in the housing and mortgage markets. Virtually no one — be they homeowners, financial institutions, rating agencies, regulators, or investors — anticipated what is occurring. Although we highlighted to investors looming issues we saw in the housing market as far back as early 2006, the reality remains that in publishing our initial ratings on many of these securities we never expected such severe, negative performance in the housing and mortgage markets. There is no doubt that had we anticipated the extraordinary events that have occurred — and we did not — we would have utilized different economic forecasts and would not have assigned many of the original ratings that we did . . . (emphasis added)

I guess deals structured by cows don’t constitute an extraordinary event.

After reading Matthew’s coverage and The Big Picture, two thoughts occurred to me:

Why don’t these people just apologize?

And didn’t anyone ever tell the S&P analysts never to write an email they might have to explain in a deposition?