WASHINGTON (Reuters) - Standard and Poor and Moody Corp. has triggered the worst crisis in decades, when they have been forced to downgrade the inflated ratings that they slapped on complex mortgage-backed securities, the U.S. Congress report concluded Wednesday.
In one of the more austere convictions of credit rating agencies, a Senate investigation Committee said the agencies continue to give high ratings in months of mortgage-backed securities after the real estate market began to collapse.
The agencies then triggered on the financial system a deluge of downgrades in July 2007, the Group of experts said.
"Perhaps more than any other single event, the sudden mass downgrades of (residential mortgage-backed securities) and ratings (collateralized debt obligation) were the immediate triggers of the financial crisis", the staff of Senators Carl Levin and Tom Coburn wrote in their report.
The results come after the Senate Permanent Subcommittee on investigations has spent two years studying with countless documents and hearings on the causes of the crisis. The probe focused only on the two more major rating agencies; Fitch Ratings has not studied.
The report proposed radical reforms of the industry that are allowed in the financial reform act, Dodd-Frank last year, but may not be realized.
Dodd-Frank has done little to change what some say is a conflict of interest inherent in the business model of credit agencies, in which the evaluators are paid by companies whose products that they rate.
The proposed reforms of the Group include having the rank of the U.S. Securities and Exchange Commission these credit agencies, based on the accuracy of their ratings.
"LOOK AT A HURRICANE".
The Senate Committee has published internal documents, showing how Moody and S & P does not have to take into account their own internal warnings on the mortgage market deterioration.
In 2006 and early 2007 emails show employees were aware of the housing market disorders, although prior to the massive drawdown in July 2007.
"It's like watching a hurricane of FL (Florida), moving to the coast slowly towards us." "You do not know if we will be beaten in full or get decimated a little or escape... without damage" an employee of S & P wrote in response to an article on the disorder of the mortgage.
The Senate investigators found that had Moody and S & P heard their own warnings, they may have issued more conservative ratings titles related to the bad qualities of mortgage loans.
"The problem, however, was that none of the two companies had a financial incentive to assign more stringent credit ratings to securities very that for a short while increased their revenues, has relaunched their stock prices and expanded their executive compensation""," said the report.
Edward Sweeney, a spokesman for S & P, said Wednesday that the Dodd-Frank Act, coupled with internal enterprise reforms, have considerably strengthened the monitoring of the industry. He added that the 2007 and 2008 downgrades "reflects unprecedented deterioration in credit quality, but were not a cause of it."
Michael Adler, a spokesman for Moody, refused to comment ahead of the publication of the report.
NO REAL CHANGE SEEN YET
The SEC has been struggling with how to curb conflicts of interest, incorporated into the so-called model "issuer-paid". Congress proposed radical reforms for the agencies in the drafting of the Dodd-Frank Act, but ultimately passed an act of radical financial regulation without them.
The Wednesday report includes emails from employees at two companies that illustrate the pressure that experienced evaluators of investment banks.
An August 2006 email reveals frustration at an S & P employee felt about the dependence of his employer on issuers of structured finance products, going so far as to describe as rating agencies with "a sort of Stockholm syndrome" - the phenomenon in which a captive begins to identify with the abductor.
The SEC did take steps to address conflicts of interest to agencies rating in recent years.
Although the Dodd-Frank Act directs the SEC to write many additional regulations for evaluators, most have yet to be proposed.
And a key rule which did enter into force in July, submitting credit agencies, to increased liability was suspended after the refusal of credit agencies to include their ratings of asset-backed securities led to a freeze on the secondary market.
The reform was not restored.
(With additional reporting by Kim Dixon;) (Editing by Steve Orlofsky)
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