If it could pass the “bovine test,” Standard & Poor’s would assign it a rating, according to CNBC. That’s the sentiment revealed in an instant message exchange by two employees occurring at the height of the credit bubble in April 2007, as reported by “Street Signs” host Erin Burnett.
On Oct. 22, lawmakers on the House Oversight and Government Reform Committee [1] blasted former executives from Moody’s Corp, McGraw-Hill Cos. Inc.’s Standard & Poor’s and Fimalac SA’s Fitch Ratings.
But what documents revealed that were released during the hearing [2] showed a very low regard for maintaining a sound rating system, demonstrated by an instant message exchange between two S&P employees:
Official #1: Btw that deal is ridiculous.
Official #2: I know right…model def does not capture half the risk.
Official #1: We should not be rating it.
Official #2: We rate every deal. It could be structured by cows and we would rate it.
The knock against the rating agencies were that they failed to properly assess the risk of subprime mortgages [3]. As the instruments that contained the risky subprime debt became more and more complex, the rating agencies didn’t adapt and money continued to be invested in the weak sector.
Some blame the government itself for the rating agencies’ ability to maintain these lax standards. Earlier on CNBC, “Power Lunch” host Michelle Caruso-Cabrera told viewers the government, not the free market, created the environment for these agencies to operate [4].
“But it speaks to the fact that ratings agencies are this government-condoned oligopoly,” Caruso-Cabrera said. “You can only be a rating agency if the government tells you you can be. Then you are legally pushed into profits because you have to be rated if you’re going to issue some of these things. These guys were printing money so easily and not doing their jobs.”