I have been a proponent of directing responsibility in last year’s credit crisis for some time now. The banks, which played a major role in the breakdown, were bailed out by the same people who had to endure the punishment.  Where is the logic in that I ask?

Banks such as Goldman Sachs and Citigroup created and distributed toxic assets, better known as mortgage-backed securities. AIG wrote billions of dollars in insurance policies on these securities, full well knowing they would have no chance to actually make good on the policies if the housing market collapsed.
But another player in the housing crisis was the rating agencies. There has been little talk up until now of them and the role they played. Quickly, rating agencies are responsible for assigning risk default likelihood on everything from government debt to junk bonds.

Much like short-term government T-bills that receive AAA ratings (considered to be risk-free), these mortgage-backed securities were being slapped with the same grades. Basically, the agencies were proclaiming that these subprime-backed securities posed as little risk of default as debt issued by the U.S. government. A monkey could tell the difference.

While I feel it was the responsibility of investors to do their own homework and see through this deception, I also feel the rating agencies have a moral obligation to correctly rate these securities.  Agencies knew full well these were not AAA material, yet most likely the pressure to generate profits for the firms led them to do so anyways.

When the same firms issuing the securities are the ones paying you to rate them, there is a flaw in the system as obviously a conflict of interest exists.
Until now, the rating agencies have come away clean. There is chatter sometimes but the media tends to point to the banks as the major culprit. While this is true to a point, the rating agencies have not been held accountable as of yet.

That all changed yesterday when Ohio General Attorney Richard Cordray sued the three major rating agencies- Standard & Poor’s, Moody’s and Fitch. Cordray was quoted as saying that the three companies disregarded their responsibility to provide “accurate credit ratings of investments.” I applaud him for stepping up to the plate and I hope there are many more lawsuits to come.

The government has spent the last year doing nothing but creating a major moral hazard that will lead to more bubbles and larger problems in the future. By bailing out banks that were insolvent and keeping them alive, the government is essentially fixing the market. Allowing failed banks to fail is what makes the free market free. The strong will survive and step in to pick up the pieces, ultimately making the market stronger.

The example that is clearly being set is that it’s alright to take huge, leverage risks that may spiral into a national epidemic. It’s alright because the taxpayers, who are represented by incompetent politicians, will be there to bail out any of the backlashes that occur from taking the huge risks.

The arguments being made by the rating agencies to justify their grades is what makes me sickest of all. They are claiming that their grades assigned to these securities are protected by the first amendment. What a bunch of hogwash. These ratings were clearly assigned because of the underlying motivation of greed. I hope the rating agencies are exposed for what they really are- puppets of the banking system.

As hard-working Americans deal with the aftermath of the mortgage meltdown, the rating agencies have up until this point escaped unscarred. Finally, someone is attempting to hold them accountable. Even our own government has demonstrated no desire to hold anyone accountable- a lot of talk and no follow through.
I hope this lawsuit is the first of many to come.