The internal email archives of ratings agencies and banks have been thrown open as part of a major government investigation, demonstrating the risk appetite of large Wall Street institutions before the global economic crash.
Frank Parisi, managing director of the global structured finance unit at Standard & Poor’s, wrote in an email as early as 2005 that the ratings agency chose to “massage” sub-prime mortgage numbers in order to “preserve market share”.
Parisi was responding to an email stating that the agency’s ratings model needed to be adjusted to account for the higher risks associated with subprime loans, which are widely seen as a large factor in the crisis as struggling homeowners failed to pay their debts.
A month later, Parisi wrote another email, reiterating that he rejected the thinking behind Standard and Poor’s actions. “Screwing with criteria to ‘get the deal’ is putting the entire S&P franchise at risk – it’s a bad idea.”
The emails emerged in a report by the US Senate Committee on Homeland Security and Governmental Affairs, which also made public "aggressive" emails by banks urging traders to grow profit through causing "maximum pain" in the market.
The report concludes that the most immediate cause of the financial crisis was the July 2007 mass ratings downgrades by Moody’s and Standard & Poor’s that exposed the risky nature of mortgage-related investments that, just months before, the same firms had deemed safe.
“The result was a collapse in the value of mortgage related securities that devastated investors”, the Committee wrote in its report. “Internal emails show that credit rating agency personnel knew their ratings would not ‘hold’ and delayed imposing tougher ratings criteria,” in order to “massage” figures, it said.
In August 2007, Eric Kolchinsky, a managing director of Moody’s collateralised debt obligation analysts, sent an urgent email to his managers about the pressures to rate more new CDOs in the midst of the mass downgrades. “This is unacceptable and we cannot rate the new deals in the same away [sic] we have done before,” he wrote. “[B]ankers are under enormous pressure to turn their warehouses into CDO notes.”
Moody’s had not provided comment at the time of writing. Standard & Poor's said in a statement that it was "disappointed by the performance of our ratings on certain mortgage-related securities". The actions it took to downgrade products in 2007 and 2008 "reflected the unprecedented deterioration in credit quality, but were not a cause of it", it said. The company insisted it was improving transparency and accuracy.
The report highlighted conflicts of interest and “heedless risk-taking” among banks, as well as failures of federal oversight.
For the 635-page report, the Committee trawled through thousands of emails and memos from ratings agencies, government bodies and Wall Street institutions including Goldman Sachs and Deutsche Bank.
The latter two came in for particularly heavy criticism, as the Committee said it would refer evidence about them to the Securities and Exchange Commission for possible criminal investigations.