The official noted there appeared to be little effort to monitor compliance and they are looking into whether violations would enable the office now to take another look at alleged misconduct in securities ratings that contributed to the collapse of financial markets.
Such agencies are paid by the issuers of bonds and other securities for ratings, raising concern about potential conflicts of interest.
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The securities carried AAA ratings, and yet offered much higher yields than other AAA-rated, non-MBS securities.
The loans are sold to banks, which then chop them up and repackage them in securities, complete with ratings and tranches to appeal to different types of investors.
And there is reason to feel comfortable with securities that debut with better ratings.
They also required partial upfront payments to prevent banks from simply buying the better ratings for those securities.
The "cooperation agreement" applied only to the firms' ratings on mortgage securities backed by subprime and other risky loans.
However, that may not be the case if 200 or 2, 000 banks fail because most held mortgage-backed-securities they thought were safe because of their AAA ratings and because the strict application of mark to market accounting for those securities in a frozen market wiped out their capital on a massive scale.
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Critics say the ratings agencies gave improperly high ratings to mortgage-backed securities because they were paid by the issuers and had an incentive to fudge.
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Other institutions, such as commercial banks and investment banks, in the U.S. and around the world, based what they thought was an acceptable distribution of risk in their portfolios on the ratings these agencies gave various securities.
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The feds may be zeroing in on similar lapses in methodology in rating complex mortgage-backed securities, which got their triple-A ratings not because of the quality of the underlying assets in the case of subprime mortgages, that quality stank but because of their structure that guaranteed payment to higher tranches of securities at the expense of the lower.
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Hauled before Congress to explain why their assessments of mortgage-backed securities had proved so off the mark, the ratings agencies pleaded ignorance: no one had seen the crash coming.
Investors who use credit ratings also do not pay directly, because ratings are generally paid for by those issuing securities.
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So investment bankers were able to stuff securities full of bad loans and still get their precious AAA ratings.
For one, ratings are paid for by the firms seeking to sell securities.
The commission pressed Blankfein on the sale of mortgage-backed securities as well as Goldman pushing the rating agencies for the highest ratings on sub-prime mortgage portfolios and then shorting them.
From mortgage-backed securities to municipal bonds, sovereign debt to collateralized debt obligations, ratings agencies have notoriously mispriced risk over the last decade, and nearly all of us have paid the consequence.
Authorities allege the ratings agency consciously understated the risks in mortgage-backed securities in the years leading up to the financial crisis, defrauding buyers of such securities counting on an accurate opinion.
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John Bella, managing director in ABS at Fitch Ratings, said net losses on auto asset-backed securities have fallen steadily since the crisis four years ago, and the deals are now backed by stronger collateral, or loans made to so-called prime borrowers.
The ratings service cited the thrift's exposure to the mortgage securities market, downgrading it to BB-minus from BBB-minus.
The ratings agencies were vilified as crisis culprits for allowing worthless mortgage securities to spread throughout the banking system.
While fellow bubble poster child Henry Blodget was kicked out of the securities business after privately bad-mouthing stocks on which he had buy ratings, investigators never laid a glove on Meeker.
Figure John Paulson was a joke on Wall Street for shorting mortgage securities until he was no longer a joke, so to presume that ratings agencies could have moved against a powerful market tide seems a reach.
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But the ratings agencies were being compensated by issuers of the mortgage-backed securities, and neuroeconomics says that created big problems.
It is true the ratings agencies dealt with a much smaller universe of mortgage-backed securities issuers and wanted to make sure they kept getting a stream of deals, Hill said.
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The government and private litigants have already uncovered a wealth of incriminating documents and e-mails showing how the ratings agencies failed to warn investors of the flaws with mortgage-backed securities.
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The second choice is to take bolder action--we abolish the "Nationally Recognized Statistical Rating Organization" status that credit ratings firms currently have (as provided by the U.S. Securities and Exchange Commission) and open up the way for competition that encourages the growth of new and diverse types of credit assessment firms that cater to investor needs with objective and dynamic measures of risk.
That 3% is a rough estimate of the treasury securities holdings of institutional investors that would be required to sell them if they lose their AAA ratings.
The SEC has eliminated some references to ratings from Depression-era laws and has proposed reducing their importance to asset-backed securities.
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