Slamming Mortgage Related Debt Products

CHICAGO (Reuters) – Analysts at Standard & Poor's Rating Services warned against mortgage-related debt products in internal e-mails that, in one case, called the complex financial deals "ridiculous," the Wall Street Journal reported in its weekend edition.

The Journal cited a draft revision of a U.S. Securities and Exchange Commission report on bond-rating firms that was first released on July 8.

An SEC examination "uncovered serious shortcomings," SEC Chairman Christopher Cox said when the report was released, adding that the problems are being fixed.

The SEC spent 10 months looking at the biggest ratings firms: Moody's, Standard & Poor's and Fimalac SA's Fitch Ratings.

DOUGLAS A. MCINTYRE WRITES:

Now that the SEC has had some time to sift though all the evidence of why credit rating agencies were so wrong in their view of mortgage-backed securities, the most disturbing finding is that S&P analysts thought their own conclusions about risk were often wrong.

According to The Wall Street Journal (subscription required), an S&P analytical staffer emailed another that a mortgage or structured-finance deal was "ridiculous" and that "we should not be rating it."

What should the government do now that it has the goods? It could fine S&P, and probably will. The fine could never be large enough to match the hundreds of billions of dollars lost by financial firms that put money into the securities. The SEC could bring charges against some of the analysts. As it is, some of them will probably lose their jobs.

The most sensible solution would be to bar S&P from rating derivatives at all. Would that leave a hole in the market? Probably. Other credit agencies might have been involved in similar misdeeds. That would mean they would have to exit the business as well.