Given the stories of inflated ratings leading unsuspecting investors to ruin, you'd think lawsuits against the credit raters would be slam dunks. But no. So far, the ratings agencies are undefeated. Here's why -- and why that streak could be in jeopardy after the latest revelations before Congress last week.
CDOs were a way for investment banks to evade their capital requirements, just as asset-backed securities played a similar role for savings and loan institutions in the 1980s. This time around the banks had plenty of help, especially from fee-hungry credit agencies.
During Friday's hearings in Washington, ex-employees of Standard & Poors and Moody's told a dark, detailed tale of how the ratings agencies produced inflated ratings. The biggest factor: "The threat of losing business to competitor rating agencies."
The Senate Committee on Homeland Security and Governmental Affairs released scads of new documents that show the behind-the-scenes pressure on ratings analysts to maintain market share by keeping banks happy. The revelations are indeed telling.
Bond sales surged 41% to $1.2 trillion last year as companies rushed to take advantage of thawing credit markets. That means demand for ratings has also boomed, and both Moody's and S&P delivered solid results recently. But that doesn't mean all the damage to their names has been undone.
McGraw-Hill reported its fourth-quarter earnings Tuesday morning, and the results handily beat Wall Street expectations. Earnings included a pre-tax gain of $10.5 million, or 2 cents per share, from the company's sale of BusinessWeek in December.
The global information provider is coming off a tumultuous year that saw CEO Harold McGraw III execute the sale of BusinessWeek to Bloomberg and a major corporate reorg.
