* Former credit rater officials admit industry mistakes
* Moody's CEO says did not foresee subprime dangers
By Dan Margolies and Kim Dixon
WASHINGTON, April 23 Former credit rating
agency officials said on Friday that the quest for market share
fueled a drive for short-term profits, sacrificing credit
quality in the process.
Eric Kolchinsky, who was in charge of the Moody's (MCO.N)
unit that rated subprime CDOs, or collateralized debt
obligations, said that people "across the financial food chain,
from the mortgage broker to the CDO banker, were compensated
based on quantity rather than quality," according to testimony
prepared for a Senate panel.
"The situation was no different at the rating agencies."
Meanwhile, the head of Moody's said that the credit rating
agency "is certainly not satisfied with the performance of our
ratings during the unprecedented market downturn of the past
"We, like many others, did not anticipate the unprecedented
confluence of forces that drove the unusually poor performance
of subprime mortgages in the past several years," Raymond
McDaniel, chairman and chief executive of the agency, said in
his prepared testimony before the Senate Permanent Subcommittee
The subcommittee is looking into the role of Moody's and
Standard & Poor's MHP.N, two of the three dominant credit
rating agencies in the United States, in the 2007-2009
The agencies' favorable ratings are widely blamed for
fostering the U.S. housing bubble. Their abrupt and massive
downgrades after housing prices stopped rising helped trigger
the subprime mortgage calamity and subsequent financial
A former executive from Standard & Poor's said his previous
firm also fell into the trap of pursuing profits and
sacrificing quality. Frank Raiter, a former managing director
at Standard & Poor's and head of the residential mortgage unit
said "focus was directed at collecting market sh
are and revenue data."
A report by the investigations subcommittee released on
Thursday found that their failure to properly gauge the risks
of structured finance products resulted from a host of factors,
including undue influence by investment banks; flawed
forecasting models, and inadequate resources.
The panel's probe also revealed e-mails in which credit
rating agencies express misgivings about investment products
like the one at the heart of a government lawsuit against
Goldman Sachs Group Inc (GS.N). [nN22130951]
One 2006 email even refers to a "flaw" in most Abacus
trades. It was a particular Abacus product from 2007 that the
Securities and Exchange Commission alleges was fraudulently
represented by Goldman to investors.
Regarding the general focus of the hearing, an S&P
spokesman said the firm learned from the crisis and has
improved its business practices.
"S&P has a long tradition of analytical excellence and
integrity. We have also learned some important lessons from the
recent crisis and have made a number of significant
enhancements to increase the transparency, governance, and
quality of our ratings," the spokesman said in an e-mail.
(Reporting by Dan Margolies and Kim Dixon; Editing by Derek