Banks Gamed Rating Agencies Using Their Models

With rating agencies under fire for giving good ratings to terrible investments, Gretchen Morgenson and Louise Story argue in the New York Times today that it wasn't all their fault. In a push for transparency, the likes of Moody's, Sandard & Poor's, and Fitch made public the computer models they use to devise ratings, and the banks took advantage of them, reverse-engineering their packages of bundled mortgages to draw deceptively high marks.

“There’s a bit of a Catch-22 here, to be fair to the ratings agencies,” a Fitch adviser tells the Times. “They have to explain how they do things, but that sometimes allowed people to game it.” To aid in the gaming Goldman Sachs and other banks also hired away ratings experts from the agencies to help construct complex deals like Abacus, the target of the lawsuit the SEC has launched against Goldman.
(More Moody's stories.)