I was perusing the list of available free Kindle Books on the Kindle store this week, and what should I find but a publication from the United States Senate Permanent Subcommittee on Investigations titled Wall Street and the Financial Crisis: Anatomy of a Financial Collapse.  As is my habit, I loaded it on my ipad for future reading.  While I have not read the entire report at this point, I have made it through the executive summary, and there is an entire section dedicated to the role of Moody's and S&P in the recent recession.

Of course, if you read the email from a couple weeks back that touched on financial ratings agencies and the need to look beyond them to other measures of carrier financial strength you know that I am already a bit critical of these agencies.  This report drives that point home further by identifying the following issues:

• Inherent conflict of interest arising from the system used to pay for credit ratings
• Ratings agencies weakened their standards as each competed to provide the most favorable rating to win business from the issuers of these securities
• Ratings models fail to include relevant mortgage performance data
• Unclear and subjective criteria used to produce ratings
• Failure to apply updated ratings models to existing rated transactions
• Inadequate staffing to perform rating and surveillance services

To be fair, the report did focus on these two as an example of the issues with ratings agencies in general.  I am sure that many of the criticisms leveled in the report can be applied to the other agencies as well.  However, we should all read the full report, which you can do here, to further our own understanding of the events leading up to the fall of 2008.   

The bottom line in the report is that there was significant financial incentive for these agencies to provide the answer the issuer wanted, rather than an accurate rating, particularly in the short term.  In addition, the unprecedented number and severity of downgrades of mortgage backed securities that were the eventual outcome of the inflated ratings, falling housing prices and defaults were identified as one of the key triggers to the plummeting value of these securities and the financial crisis as a whole.

So why talk about rating agencies again?   

For one, I find the way I came upon this report interesting.  The fact that this publication would be on the Kindle book store, let alone in the top 100 free ebook downloads is a clear indication of how important this distribution is becoming.  That enough people downloaded the report to land it on the top 100 restores a bit of my faith in the public's interest in these issues beyond the sound bites they see on TV or read on an internet news feed.  Maybe that is a positive outcome of the recession: more people are paying attention.

The other is a rather scary remedy to all of this suggested in the report: "The SEC should use its regulatory authority to facilitate the ability of investors to hold credit rating agencies accountable in civil lawsuits for inflated credit ratings, when a credit rating agency knowingly or recklessly fails to conduct a reasonable investigation of the rated security."

I am not sure that civil litigation after the fact is really a remedy in the first place (Nor is this the only remedy suggested).  Is the government really going to encourage us to litigate over investment losses?  If someone is unsophisticated enough to base their investment decisions, or carrier selection for that matter, solely on the ratings of one of these agencies, they deserve to lose their shirt!  Last time I checked you had to take some risk to make a profit in our country.