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 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

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Federal and state rules required or encouraged financial firms and some insti-
tutional investors to make investments based on the ratings of credit rating agen-
cies, leading to undue reliance on those ratings. However, the rating agencies
were not adequately regulated by the Securities and Exchange Commission or any
other regulator to ensure the quality and accuracy of their ratings. Moody’s, the
Commission’s case study in this area, relied on flawed and outdated models to is-
sue erroneous ratings on mortgage-related securities, failed to perform meaning-
ful due diligence on the assets underlying the securities, and continued to rely on
those models even after it became obvious that the models were wrong.
Not only did the federal banking supervisors fail to rein in risky mortgage-
lending practices, but the Office of the Comptroller of the Currency and the Of-
fice of Thrift Supervision preempted the applicability of state laws and regulatory
efforts to national banks and thrifts, thus preventing adequate protection for bor-
rowers and weakening constraints on this segment of the mortgage market.