According to William Black, the last fed regulator who closed S&L during the S&L crisis of the 1980’s, finding the rating agencies guilty is not so hard. The key witnesses against the rating firms will be the analysts that work for it. One of the criterias to determine fraud or incompentence is comparing the firms actions against common practice of the industry. Example, Bank A pays rating agency to assign a rating for a mortgage portfolio. Analyst will ask for the data (includes applicants application/docs for each mortgage note in the portfoilio). Base on all the data given, the analyst can calculate the risk of the portfolio. Analyst can verify the info on the applicants application to double check the veracity of the loan data. Problem is many banks accepted/encouraged liar loans, where applicants made up income, asset info and the banks doctured the credit scores. Fearing the analysts working for the rating agencies will detect these aberate data, banks have refused to provide it to the analysts assigned to rate their products. Instead the bankers call the analysts supervisors to complain they were getting unsatisfactory service from the analysts and if the situation is not rectified the bank will take their future business to other rating agencies!!! Since the rating agencies are paid huge fees to analyze/rate bank products, they cave to the bankers’ pressure and instruct their analysts to find a way to satisfy the banker client. IAW assign a AAA rating or be fired. Many analysts fearing their reputation being damaged by the forced illegal acts have maintained copies of MFR just in case their AAA ratings become an issue again. I think the gov may have a case if many analysts testify of being pressured by management to assign a AAA rating despite the fact that the banks did not provide the data requested. The sad part is the rating agency CEO is the ones trapped between their analysts testifying against them and the banks denying they coerced the rating agencies into lying. Bottom line the CEO and exec are the ones going to jail and fined, not the analyst who were protesting the illegal act and the banker who created the mess.
Does the government pay the rating agencies to rate their bonds and other securities?
If not, wouldn’t it be like me suing a television sports handicapper who was shilling a line that I played and ultimately lost. In this scenario I’m not paying this guy, I’m just taking his “advice” that he has made public.