When the U.S. housing boom collapsed, the world’s largest banks reported $2.1 trillion in losses and writedowns amid the worst financial crisis since the Great Depression.
“There are still problems in the industry, and without a fix, retirees, investors, and our entire economy are still vulnerable,” Democratic Senator Al Franken of Minnesota, who has proposed creating a board that would select which companies grade structured finance securities, said in an e-mailed statement. Without changes, the U.S. could “suffer through another economic collapse.”
Richard Cantor, the chief credit officer at Moody’s, said last year in an e-mail that “we have only one objective, which is to assign ratings that are indicative of the relative risk of default and losses.” Grades should be evaluated over time with defaults, not with “short-run movements in market prices,” S&P’s Sweeney said.
The rating companies are “deeply entrenched in the market,” Gene Phillips, a director at PF2 Securities Evaluations Inc., a New York company that values structured products, said in a telephone interview. “If investors aren’t going to push back on what they’re looking for, you’re not going to get improvement in standards.”