Ratings agencies nailed.

Robert Waldmann

D. Keith Johnson, a former president of Clayton Holdings, a company that analyzed mortgage pools for the Wall Street firms that sold them, told the [financial crisis inquiry] commission on Thursday that almost half the mortgages Clayton sampled from the beginning of 2006 through June 2007 failed to meet crucial quality benchmarks that banks had promised to investors.


“We went to the ratings agencies and said, ‘Wouldn’t this information be great for you to have as you assign tranche levels of risk?’ ” Mr. Johnson testified last week. But none of the agencies took him up on his offer, he said, indicating that it was against their business interests to be too critical of Wall Street.

“If any one of them would have adopted it,” he testified, “they would have lost market share.”

The investment banks who paid Clayton Holdings for the analysis used it to get the mortgages for a low price but didn’t share the data with investors. Both the investment banks and the ratings agencies defend themselves noting vague statements about declining underwriting standards in prospectuses and “research and commentary” respectively.

Clearly the vagueness was deliberate “some loans in the pool don’t meet the declared standards” is no briefer and less informative than “most loans in the pool don’t meet the declared standards.” It is almost as clear that no one will pay penalties proportional to the direct harm to investors (let alone the indirect costs of the crisis). Morgan Stanley executives settled out of court with the State of Massachusetts for $102 million — and laughed all the way back to their bank.

I’m going long pitchforks.