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Role of Credit Rating Agencies On The Financial Crisis: Alston & Bird LLC
Role of Credit Rating Agencies On The Financial Crisis: Alston & Bird LLC
Panel 1
Panel 2
Panel 3
According to Mr. Kolchinsky, “the cause of the financial crisis lies primarily
with the misaligned incentives in the financial system. Individuals across the
financial food chain, from the mortgage broker to the CDO banker were
compensated based on quantity rather than quality [and] the situation was
no different at the rating agencies.” Mr. Michalek stated that the
independence of Moody’s Structured Derivative Products Group changed
dramatically during his tenure and acknowledged that the competition
amongst credit agencies meant there was constant pressure to accept deals.
According to Mr. Michalek, “the unwillingness to say ‘no’ grew. The message
from management was not, ‘just say no,’ but instead, ‘just say yes’.”
Agreeing with the PSI’s conclusion that the credit agencies were using
inaccurate rating models that were affected by competitive pressure, Mr.
Cifuentes noted that a core problem was that credit rating agencies
determined the basis for the ratings. He emphasized that the “raters can
change what BBB means. [The basis for the ratings] is screwed up at a very
fundamental level.”
Panelists who are current executives at the rating agencies were generally
more reluctant to acknowledge the effects of competitive pressures and
stressed the rating agencies’ efforts to improve ratings quality. Despite
skepticism expressed by Sen. Edward Kaufman (D-DE), Ms. Yoshizawa
claimed that she “personally [did not] feel undue pressure from the top to
increase business.” Ms. Barnes claimed to have no knowledge of incentives
being tied directly to the number of deals rated. Mr. McDaniel said he was
unaware of terminations related to market share issues. In addition,
although Mr. McDaniel testified that Moody’s was not satisfied with the
performance of their ratings, he asserted that “neither [Moody’s] nor most
other market participants, observers, or regulators fully anticipated the
severity or speed of deterioration in the financial markets.” In addition, the
current executives argued that their firms took actions they assumed
appropriate at the time, such as Mr. D’Erchia who stated that S&P has
“always been committed to doing the best we can to develop and maintain
appropriate ratings.