Credit and blame

The rating agencies operate on shaky foundations

As Oscar Wilde might have said, it is the unspeakable in pursuit of the unrateable. America's Congress is holding hearings on the subprime-mortgage shambles and the losses that have resulted. The firms that must be feeling most nervous about the outcome are Standard & Poor's (S&P), Moody's and Fitch.

Those rating agencies have earned huge sums in the past ten years offering opinions on the creditworthiness of an alphabet soup of mortgage-related securities created by over-eager banks. As the market blossomed, so did the agencies' profits. Moody's net income rose from $289m in 2002 to $754m last year. But did the fat fees lead to a drop in standards?

The agencies feel aggrieved at the criticism. S&P says it has downgraded just 1% of subprime residential mortgage-backed securities, and that none of those downgrades affected the triple-A bonds. So far, defaults have hit only three of the mortgage tranches it has rated. Of more complex products, collateralised-debt obligations (CDOs) downgrades have affected just 1% of securities by value.

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