Ratings Agencies Hit for Role in Financial Crisis

"The story of the credit rating agencies is a story of colossal failure," according to Representative Henry Waxman (D-CA), chairman of the House Oversight and Government Reform Committee in a statement released on Wednesday.

Rep. Waxman's committee is investigating the credit crisis and put much of the blame on those agencies such as Standard & Poor's (S&P) and Moody's for giving top ratings to securities backed by subprime mortgage loans.  The committee held the first of two days hearings on the crisis Wednesday titled "Credit Rating Agencies and the Financial Crisis."  The second hearing on Thursday will deal with the role of federal regulators in the crisis.

According to Andrew Taylor, writing for the Associated Press, the committee released internal documents showing that executives of the rating agencies were "well aware that there was little basis for giving AAA ratings to thousands of increasingly complex mortgage-related securities but the companies often vouched for them anyway."

The three biggest ratings agencies, S&P, Moody's and Fitch, Inc.; made huge profits for giving top ratings to the securities.  The agencies apparently relied on ever increasing home prices for the confidence they placed in the mortgages.  Two of the agencies, S&P and Moody's, have now downgraded thousands of their previous top ratings.

Rep. Waxman blamed the rating agencies and federal regulators for putting the entire financial system at risk and betraying the public trust.

The committee heard testimony from former top employees of the agencies who said that there is a conflict in the ratings system because the credit agencies are paid by the companies which insure the securities instead of investors who have the most to lose.

The executives said that they were caught offguard when housing prices fell and their ratings models failed to hold up.

Another problem is that securities issuers gave their business to the company with the most lax standards, giving competitors an incentive to go easy as well.

In other financial crisis news, the Associated Press is also reporting that American International Group (AIG) has agreed to freeze millions of dollars in compensation and bonuses for some of its former executives.

AIG is the recipient of billions of dollars of federal money as a bailout measure and has already been under fire for a luxury "retreat" it sponsored for top employees at a spa only days after the bailout was announced.  The company subsequently cancelled another expensive get-away it had planned.

The announcement of the freeze was made by new York Attorney General Andrew Cuoma on Wednesday.  In a letter to newly appointed AIG chairman Edward Libby Cuoma said that, based on his office's review of corporate documents AIG has agreed to stop any payments to former CEO Martin Sullivan under a $19 million pay package.  AIG also confirmed that no payments will be made out of its $600 million compensation and bonus funds.  The AP said that this includes $162 million in company shares awarded through options to six top executives.