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May 13th, 2010
The lead story in today’s New York Times, titled “Prosecutors Ask if Eight Banks Duped Rating Agencies,” describes a new investigation intitiated by Attorney General Andrew Cuomo to determine whether investment banks improperly received overly high ratings by agencies evaluating their mortgage securities.
The banks being investigated include Goldman Sachs, Morgan Stanley, UBS, Citigroup, Deutsche Bank, Credit Agricole and Merill Lynch. The ratings agencies are Standard and Poor’s, Fitch Ratings and Moody’s Investors.
The article goes on to observe that workers at the ratings agencies frequently became employees, at a much higher salary, of the banks they were evaluating. These employees then frequently interfaced with their former colleagues at the ratings firms.
Anyone who has an inkling about the power of networking in business relationships will immediately realize the meaning of this observation.
The article even describes a term in frequent use among investment bankers regarding this corrupt system. The bundling of mortgage securities for rating purposes was referred to as “ratings arbitrage.”
One wonders how effective Mr. Cuomo’s investigation will be in the long run. After the spotlight fades, won’t banks, Wall Street, etc., go back to their cozy ways? What real punishment will these investment banks receive? And, perhaps more poignantly, how much is Mr. Cuomo’s investigation based on real prosecution and how much on his future run for Governor?
We shall see.
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