Were Credit-Ratings Companies Pressured on Subprime Bonds?

A federal probe into credit-rating companies that continued to give top rankings to subprime-backed securities long after they had become suspect has now turned to focus on the possibility of Wall Street pressure on the ratings.Sen. Bunning likened the rating process to “a movie studio paying a critic to review a movie and then using a quote from his review in the commercials.”Standard & Poor's and Moody's Investors Service are among the credit-rating companies that have been the subject of an investigation by the Securities and Exchange Commission (SEC).The firms have been chastised by both investors and members of Congress for overvaluing a host of subprime bonds and failing to downgrade the securities even after their value had significantly deteriorated.The Senate Banking Committee noted that some bonds backed by defaulted mortgages fell by more than 50 cents on the dollar before being downgraded.A new report by Credit Suisse Group indicated that 171 subprime-backed securities issued in 2006 with investment-grade ratings were downgraded within 12 months, up from just 11 one year earlier.In recent months, S&P and Moody's have downgraded a minimum of 500 securities and tightened the criteria for rating new issues. First announced last month, the SEC investigation now has expanded to determine whether the ratings were “unduly influenced'' by the issuers and investment banks looking to sell the securities, according to SEC Chairman Christopher Cox.A number of lawmakers on the Senate Banking Committee cited a conflict of interest for the ratings companies being paid to evaluate bonds by the same companies that wanted to sell them.“It seems to me that money is trumping ethics in this area of ratings,” said Sen. Richard Shelby.Both S&P and Moody’s have denied any wrongdoing or conflict of interest.Posted on Thursday, September 27, 2007 by staff