2008 Archives

Ratings agencies left their seal on meltdown


The following is from the Oct. 21, 2008, edition of The Dallas Morning News. Finance Professor Kumar Venkataraman of SMU's Cox School of Business provided expertise for this story.

October 21, 2008

By JIM LANDERS jlanders@dallasnews.com

WASHINGTON – Lenders recoiling at the sight of mortgage-backed securities have frozen global credit and put us all in a deep economic crisis.

You can blame the borrowers who didn't pay attention to prudence. You can blame the lenders for being blind to credit risk. You can blame the financial engineers who blended these mortgages into exotic securities and sold them all over the world.

Blame the credit rating agencies as well. They are the ones that put a seal of approval on most of these securities.

"They played a critical role in this crisis," said Southern Methodist University finance professor Kumar Venkataraman. "Many institutions around the world who purchased these complex collateralized securities, I suspect, did not fully understand what they were buying.

"However, they were able to justify these purchases because very reputable institutions like Standard & Poor's, Moody's and Fitch [Ratings] had rated these securities investment-grade."

What happened, in effect, was that the rating agencies gave the financial engineers copies of the test. They let them take it several times until they got their risky debts diffused enough to earn the grade they wanted – investment-grade, mostly that gold standard AAA.

The rating agencies then did a separate analysis of default risk that often proved overly optimistic.

Read the full story.


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