Moody's blues
Collapse of the financial markets involved a failure of oversight
The financial markets didn't just collapse. They were sabotaged. And the people who did it have names and addresses.
What those Pirates of the Hudson didn't have — as they concocted, inflated, sold and ran away from the exotic financial instruments that nearly created a global economic depression — was anyone looking over their shoulder.
Various postmortems of last year's meltdown make it clear that neither the government agencies that were created to oversee the canyons of Wall Street, nor the supposedly independent credit rating agencies that live there, had the desire or the wherewithal to do their very important jobs.
A recent investigative report by McClatchy Newspapers outlines how the culture at one key ratings agency, Moody's Investors Service, radically changed over the course of a few years from that of a conservative watchdog to that of a go-go get-along that put short-term profits ahead of its long-nurtured reputation. (The McClatchy story focused on Moody's, because it had a good source in a whistle-blower who used to work there. But the entire industry had put itself in the same leaky boat.)
Because nobody at the Securities Exchange Commission, Federal Reserve or other agency had either the authority or the manpower to stop them, Moody's, Fitch Ratings and Standard and Poor's turned from serving the interests of investors to meeting the needs of those marketing ever-more-complicated investments that nobody understood.
Once upon a time, people who wanted an expert opinion on whether a potential investment was a good risk were the ones who paid the rating agencies for their advice. Starting in the 1970s, that culture began to change to one where those offering the investments paid for the opinion.
Then, come 2000, Moody's was spun off from former parent Dun and Bradstreet and offered stock in itself. So Moody's didn't just examine investments. It became one. And, because it wanted to be a popular investment, it joined a growing Wall Street culture of getting paid big bucks to give unfathomable financial offerings high safety ratings.
After the subprime mortgage bubble popped last year, an SEC report roasted the ratings agencies — and voices in Congress, later joined by the incoming Obama administration, called for new regulations that would at least make it clear to investors that independent ratings of various bonds were perhaps not independent after all.
A dose of 21st century regulation from Congress is in order, and lawmakers such as Barney Frank in the House and Arlen Specter in the Senate are pushing various bills that would do that. Among the options are laws that would make it easier for the victims of investment scams to sue not only the major players but also any ratings agency, accounting firm or other third party that willingly set aside its responsibility for a quick million.
Of course, that would involve standards of proof, as it should. But the counter-argument, that regulation would shut down the markets and cost people jobs, only makes sense to those who don't remember the market gridlock and lost jobs that followed the last round of unfettered capitalism.
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