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 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

mortgage-backed securities and CDOs were not considered the “super-safe” invest-
ments in which investors—and some dealers—had only recently believed.
Cayne called Spector into the office and asked him to resign. On Sunday, August
, Spector submitted his resignation to the board.

RATING AGENCIES: “IT CAN’T BE . . . ALL OF A SUDDEN”
While BSAM was wrestling with its two ailing flagship hedge funds, the major credit
rating agencies finally admitted that subprime mortgage–backed securities would not
perform as advertised. On July , , they issued comprehensive rating down-
grades and credit watch warnings on an array of residential mortgage–backed securi-
ties. These announcements foreshadowed the actual losses to come.
S&P announced that it had placed  tranches backed by U.S. subprime collat-
eral, or some . billion in securities, on negative watch. S&P promised to review
every deal in its ratings database for adverse effects. In the afternoon, Moody’s down-
graded  mortgage-backed securities issued in  backed by U.S. subprime col-
lateral and put an additional  tranches on watch. These Moody’s downgrades
affected about . billion in securities. The following day, Moody’s placed 
tranches of CDOs, with original face value of about  billion, on watch for possible
downgrade. Two days after its original announcement, S&P downgraded  of the
 tranches it had placed on negative watch. Fitch Ratings, the smallest of the three
major credit rating agencies, announced similar downgrades. 
These actions were meaningful for all who understood their implications. While
the specific securities downgraded were only a small fraction of the universe (less
than  of mortgage-backed securities issued in ), investors knew that more
downgrades might come. Many investors were critical of the rating agencies, lam-
basting them for their belated reactions. By July , by one measure, housing
prices had already fallen about  nationally from their peak at the spring of . 
On a July  conference call with S&P, the hedge fund manager Steve Eisman ques-
tioned Tom Warrack, the managing director of S&P’s residential mortgage–backed se-
curities group. Eisman asked, “I’d like to know why now. I mean, the news has been
out on subprime now for many, many months. The delinquencies have been a disaster
now for many, many months. (Your) ratings have been called into question now for
many, many months. I’d like to understand why you’re making this move today when
you—and why didn’t you do this many, many months ago. . . . I mean, it can’t be that
all of a sudden, the performance has reached a level where you’ve woken up.” Warrack
responded that S&P “took action as soon as possible given the information at hand.” 
The ratings agencies’ downgrades, in tandem with the problems at Bear Stearns’s
hedge funds, had a further chilling effect on the markets. The ABX BBB- index fell
another  in July, confirming and guaranteeing even more problems for holders of
mortgage securities. Enacting the same inexorable dynamic that had taken down the
Bear Stearns funds, repo lenders increasingly required other borrowers that had put
up mortgage-backed securities as collateral to put up more, because their value was
unclear or depressed. Many of these borrowers sold assets to meet these margin calls,