The financial crisis required willing participation from many industries. One of those was the credit rating industry, more specifically the companies Standard & Poor's, Fitch and Moody's. These credit agencies slapped AAA creditworthiness ratings on the riskiest of loans.
Standard & Poor was the largest player of all the credit agencies during the housing boom and their president from 2004 to 2007 was Kathleen Corbet.
Why would S&P put their stamp of approval on these risky and uncertain loans? Well, its because they were receiving payments from the bond issuers. You may ask yourself -- "is this a conflict of interest?" Let's see what Kathleen has to say about that in her April 23, 2010 testimony before the congressional subcommittee:
"During my tenure -- and indeed long before and since -- S&P employed an "issuer pays" model. As with any business model in which one party pays another, the "issuer model" has inherent potential conflicts of interest. In order to manage such conflicts S&P had a number of policies and procedures in place."
Let's now hear from an analyst at S&P on how these "policies and procedures" worked:
"A bond could be structured by a cow and we would rate it."
Good work, Ms. Corbet. I like how you managed to remove yourself from the sticky situation before the rest of the world caught onto your "policies and procedures."
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