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Who's More to Blame: Congress or the Ratings Agencies?

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The case for Congress, by Rich Smith
Who's to blame for this mess?


Since the financial crisis hit, U.S. taxpayers have been handed a $700 billion TARP bill and told to bail out banks "too big to fail." Well, guess who let the banks become too big?


You can read the whole sordid saga here in CAPS All-Star milpo's blog. What it boils down to is this: Decades of lobbying by Citigroup (NYSE: C  ) , JPMorgan Chase (NYSE: JPM  ) , and Deutsche Bank (NYSE: DB  ) culminated in the repeal of the Glass-Steagall Act in 1999, and the creation of the megabanks. Who repealed the law, and unleashed the lions?


Now that the damage is done, our housing and financial markets wrecked, what's Congress doing to fix the mess? It's serving up pork, raising taxes, and regulating the interstate sale of monkeys..

I blame Congress. So should you.

Who's not to blame? Ratings agencies. The ratings agencies did their best.

But my fellow Fool David Lee Smith tells us that the ratings agencies -- Moody's (NYSE: MCO  ) , McGraw-Hill's (NYSE: MHP  ) Standard & Poor's, and Fitch -- are to blame for the mess we're in today.

According to David, they're the ones who failed to provide "in-depth and accurate analyses of the contents of mortgage-stuffed securities." Instead, they tried to apply their own time-tested models for rating corporate debt to the newfangled financial products that were coming out of Wall Street. But can you blame them?

I mean, these were totally novel products, with which the raters had no prior experience. So maybe they cut corners trying to fit polygonal pegs into round holes -- but until you try that, and fail, how do you know the polygon won't fit? The raters made their best guesses at the likelihood of MBS defaults. They guessed wrong. They'll do better next time.

The case for the ratings agencies, by David Lee Smith
In the past, I've written several articles for The Motley Fool attempting to place the blame for our housing apocalypse and the credit crunch that stemmed from it. I've named everyone from the lenders to Congress to borrowers, and even thrown in an avaricious realtor or two.

But beyond these groups, and perhaps some overzealous homebuilders -- I'm thinking of the likes of Toll Brothers and Beazer -- I'm convinced that there are other participants in this chain of events who have received minimal attention, and without whose clear incompetence housing's metastasis to the general credit arena likely wouldn't have occurred. I'm speaking here in particular of the ratings agencies, folks such as the Standard & Poor's unit of McGraw-Hill, Moody's, and Fitch Ratings.

These firms were hired by the likes of Goldman Sachs (NYSE: GS  ) and Morgan Stanley (NYSE: MS  ) to bless their mortgage-backed packages, and they apparently did so with indiscriminate rubber stamps. With more diligence and professionalism on the part of the raters, what we now call "toxic" loans might have been filtered from investors' portfolios, and our current financial world would have been less afflicted than it is.

You'll recall that during his term in office, President Harry Truman adorned his office with a famous sign reading "The Buck Stops Here." So we just might want to climb high on the Washington ladder to find those most culpable for our worsening financial catastrophe.

Indeed, there are those who would hold Congress culpable for our current set of housing difficulties, and by extension our financial mess. But Congress consists of more than 500 individuals, and it's rare to get them to agree on anything. I continue to believe that the team most identifiable for not averting our current contagion can be limited to the ratings agencies, a small group who clearly didn't dig deeply enough into, or properly evaluate, the products they were examining.  

Vote now!
Now it's your turn. What do you think is more responsible for the mortgage mess: the incompetence of Congress or the incompetence of the ratings agencies? Make your pick below.

Check out the Fool’s entire 2009 March Madness bracket here.

JPMorgan Chase is a former Motley Fool Income Investor recommendation. Moody's and The McGraw-Hill Companies are Motley Fool Inside Value selections. Moody's is a Motley Fool Stock Advisor recommendation.

Fool contributor Rich Smith owns shares of Moody's. Fool contributor David Lee Smith doesn't own shares in any of the companies mentioned. The Fool has a financially sound disclosure policy.

Read/Post Comments (6) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 17, 2009, at 6:39 PM, pethier wrote:

    Raters at all the ratings companies told their superiors that they should NOT be rating these things and were ordered by their superiors to rate them anyway. The higher-ups were greedy and wanted the commissions. They knew that if they did not well-rate these packages, the customers would go to the other services. They should go to jail for fraud.

  • Report this Comment On March 17, 2009, at 10:02 PM, edator wrote:

    congress 79%;

    ratings agencies 21%



  • Report this Comment On March 18, 2009, at 12:12 PM, LMKbird wrote:

    Yea...but we don't elect Congressmen because they're financial gurus...we elect them because we want to have guns, fight abortion and other single issues. Seirously, they are there to to develop policy and direction.... Only some of them know much about finances or economics...that's why they created overdsight agencies and supposedly hire people who do have the knowledge and ability to read financial statements--byzantine as they may have become. Now some committees should have been watching granted.... On the other hand -- the Congress and the American Public have been mesmerized by by all the "free market" and deregulation blather...we are all to blame...How about changing the term of office of Representatives from 2 to 4 they can really begin overseeing and reading stuff rather than always flying home and electioneering.

  • Report this Comment On March 18, 2009, at 2:31 PM, jpanspac wrote:

    Come on, this is like pitting two #1 seeds against each other in the first round. Both of these clowns should make it to the final four.

  • Report this Comment On March 18, 2009, at 2:36 PM, ziq wrote:

    Congress is justifiably unpopular today and it is rife with corruption. But its corruption, for the most part, did not cause the financial mess. The rating agencies were in bed with the people whose products they were rating.

  • Report this Comment On March 18, 2009, at 10:40 PM, Clint35 wrote:

    I can't vote on this one. It's too hard. I think they've both done a terrible job. Would the stupid ratings agencies even exist if weren't for the stupid government requiring companies to get ratings. But I certainly don't agree that the ratings agencies did the best job the could.

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