Credit Ratings Firms Spun Tales to Spin Gold

In case you think truth never comes to light in Congress, then look at the Washington Post story about how the credit rating agencies knew for at least a year that they helped fuel the financial meltdown.

In one of the confidential documents obtained by the committee, Raymond W. McDaniel, chief executive of ratings firm Moody's, said analysts and executives are "continually 'pitched' by bankers, issuers, investors . . . whose views can color credit judgment."

"we 'drink the kool-aid,' " he wrote in a Oct. 21, 2007, memo to the board. "Unchecked, competition on this basis can place the entire financial system at risk."

I think this shows that their claims of "getting to the bottom" of programming errors in their risk management systems was so many lies and an attempt to slide a knife in the backs of technicians for what was primiarily an issue of their own greed.

Frankly, this has been true for many years and is exactly the same type of situation as faced the accounting firms that wanted to provide consulting and auditing services at the same time. You can't do it fairly because there's an inherent conflict of interest. Your vast income is the result of kissing the plump rear of those who run the client companies. People will always act in accordance with their personal financial incentives.

In short, I think this means that no one can believe a single word coming from any of the rating agencies. If they are willing to pump up ratings based on rewards, why wouldn't they knock down ratings because of the lack of them. I suspect that will come out at some point because it's part of the same human nature: If you won't look out for me, then screw you.

Now consider the extent of this. You can't trust the ratings on securities. On banks. On insurance carriers. On bonds. On anything. It might be that the ratings are often accurate, but how can you know? The morally reprehensible action of all these executives who knew of the problems and did nothing was that they destroyed any sense of trust in the system. Not blind belief, but the trust that institutions will do more or less what they are supposed to do. When that goes, so does the willingness to invest.

"We have to earn our credibility back," said Deven Sharma, president of Standard & Poor's.

Mr. Sharma, you simply cannot. No one with any sense will ever believe any of you, because you've all proven what you are willing to do to line your pockets. There's no reason to expect that you would be any less willing in the future so long as you thought that you wouldn't be caught. I'd call all of them a pack of swine, but it would be degrading to pigs.