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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
CDOs; pushing ratings out the door with insufficient review; failing to adequately
disclose its rating process for mortgage-backed securities and CDOs; and allowing
conflicts of interest to affect rating decisions.
So matters stood in , when the machine that had been humming so smoothly
and so lucratively slipped a gear, and then another, and another—and then seized up
entirely.
COMMISSION CONCLUSIONS ON CHAPTER 10
The Commission concludes that the credit rating agencies abysmally failed in
their central mission to provide quality ratings on securities for the benefit of in-
vestors. They did not heed many warning signs indicating significant problems in
the housing and mortgage sector. Moody’s, the Commission’s case study in this
area, continued issuing ratings on mortgage-related securities, using its outdated
analytical models, rather than making the necessary adjustments. The business
model under which firms issuing securities paid for their ratings seriously under-
mined the quality and integrity of those ratings; the rating agencies placed market
share and profit considerations above the quality and integrity of their ratings.
Despite the leveling off and subsequent decline of the housing market begin-
ning in , securitization of collateralized debt obligations (CDOs), CDOs
squared, and synthetic CDOs continued unabated, greatly expanding the expo-
sure to losses when the housing market collapsed and exacerbating the impact of
the collapse on the financial system and the economy.
During this period, speculators fueled the market for synthetic CDOs to bet
on the future of the housing market. CDO managers of these synthetic products
had potential conflicts in trying to serve the interests of customers who were bet-
ting mortgage borrowers would continue to make their payments and of cus-
tomers who were betting the housing market would collapse.
There were also potential conflicts for underwriters of mortgage-related secu-
rities to the extent they shorted the products for their own accounts outside of
their roles as market makers.
