Mortgage crisis

As the dust from the mortgage crisis slowly dissipates we can use the gift of hindsight to try and make some sense out of the whole mess. Since there are many things that went wrong and many of those are quite complicated, I will zero in on one small aspect, that being the rating agencies. The big three are Standard and Poor’s, Moody’s and Fitch. My first encounter with S&P came 40 plus years ago in the financial planning business. I worked for Equitable of New York and would proudly tell my clients that my company was rated triple A by the rating companies. I investigated to find out just what this meant and very quickly realized that the whole rating system was flawed. S&P would ask The Equitable for important data they needed to evaluate the strength of the company so they could select a rating. Talk about the fox guarding the hen house! The weakness of this approach is further exaggerated when you realize that the rating companies get their fees from the companies they evaluate. Fast forward to the recent mortgage crisis and while there are many mortgage companies, concentrate on Fanny Mae which is the largest. The executives at each company were intertwined in such a way that they both benefited when the volume of home loans grew. In the scheme of things the quality of the loans had no bearing on the push for more loans. As Fanny Mae grew the fees paid to S&P grew and it was a carbon copy of the relationship between the insurance companies and the rating companies. The most amazing part is that this same incestuous relationship still exist to this day and no one seems to care.