E-mails released to Congress show analysts had reservations about rating some securities, writes Proinsias O'Mahony

CREDIT RATING agencies are feeling the heat after the US Congress released internal e-mails that showed that analysts had serious reservations regarding securities they were giving top notch ratings to, with one analyst saying that the agencies had created a "monster".

"Let's hope we are all wealthy and retired by the time this house of cards falters," he joked.

The agencies are under the spotlight as politicians investigate how AAA ratings were given to thousands of mortgage-backed securities that subsequently plunged in value, leading to hundreds of billions of dollars in writedowns in the firms who bought them.

Agencies were paid by the companies whose bonds they rated, leading to accusations of an inherent conflict of interest.

In one recorded conversation between two Standard Poor's analysts in April 2007, one official remarked that a particular deal was "ridiculous" and that "we should not be rating it".

His colleague replied that the model being used "does not capture half the risk", but "we rate every deal. It could be structured by cows and we would rate it".

In September 2007, a Moody's analyst commented that "we had blinders on and never questioned the information we were given", adding that their errors made them look either "incompetent at credit analysis, or like we sold our soul to the devil for revenue".

E-mails also make clear that analysts were forced to rate products without access to data essential to making an accurate assessment. In 2001, an SP employee asked his superior for additional loan data to rate a product backed by home loans.

"Any request for loan level tapes is totally unreasonable!" he was told. The analyst was told to "devise some method" of producing credit estimates.

Jerome Fons, a former executive at Moody's, confirmed that the firm's focus changed from protecting investors to "maximising revenues" as far back as 1994. Management made a concerted effort to make the firm more issuer-friendly, Fons said, as they were the people who paid the bills. The best businessmen and women, rather than the best analysts, rose through the ranks, he added.

Moody's chairman Raymond McDaniel admitted as much last October. In a confidential presentation entitled Conflict of Interest, he said that the entry of rating agency Fitch into the industry had upset the previous dominance of Moody's and SP. Bond issuers typically chose the agency with the lowest standards, McDaniel said, "engendering a race to the bottom in terms of rating quality". Moody's "has struggled for years with this dilemma", McDaniel said, warning that "competition on this basis can place the entire financial system at risk".

By the time of McDaniel's presentation, Moody's was beginning to incur the wrath of the investors who had bought top-rated mortgage-backed securities.

One firm complained that agencies "allow issuers to get away with murder".

A high-ranking executive at Fortis, the European financial that had to be rescued last month, angrily protested that Moody's had "legitimised" dangerous products and therefore fooled "sucker managers". She said the ratings were "bs".

The agencies were eventually forced to downgrade thousands of supposedly safe securities after house prices tumbled and delinquencies on the underlying loans escalated way beyond estimates.

Financials have now suffered $660 billion in subprime-related losses.

Democratic congressman Henry Waxman accused the agencies of a "colossal failure".

Waxman pointed out that total revenues for the three main firms doubled from $3 billion in 2002 to over $6 billion in 2007, with Moody's having the highest profit margin of any company in the SP 500 for five years in row.

Seán Egan, managing director of an independent rating agency that does not receive payment from issuers, was even more blunt in his appraisal.

"Accept the ratings agencies for what they are: stupid. Don't beat up on for doing what they have an incentive for doing. Don't curb it, change it."

At any rate: what the agencies said

"Let's hope we are all wealthy and retired by the time this house of cards falters." - an unnamed analyst in an internal e-mail released to Congress

"We rate every deal. It could be structured by cows and we would rate it." - a Standard Poor's analyst claims, in April 2007, that every deal is rated, irrespective of the structure

"Competition on this basis can place the entire financial system at risk." - Moody's chairman Raymond McDaniel on the entry of rating agency Fitch into the industry

"We had blinders on and never questioned the information we were given." - a Moody's analyst comments on the agency's rating process

"Incompetent at credit analysis, or like we sold our soul to the devil for revenue." - The same Moody's analyst on the impact of the errors that the agencies made

"Accept the ratings agencies for what they are: stupid. Dont beat up on for doing what they have an incentive for doing. Dont curb it, change it." - Seán Egan, managing director of an independent US rating agency that does not receive payment, offers a blunt appraisal of the rating industry