Credit Agencies, An Excerpt From The Big Short

To judge from their behavior, all the rating agencies worried about was maximizing the number of deals they rated for Wall Street investment banks, and the fees they collected from them.

Moody’s once a private company, had gone public in 2000. Since then its revenues had boomed, from 800 million dollars in 2001 to 2.01 billion dollars in 2006. Some huge percentage of the increase –more than half, certainly, but exactly how much more than half they declined to tell Eisman –flowed from the arcane end of the home finance sector, known as structured finance.

The surest way to attract structured finance business was to accept the assumptions of the structured finance industry. “We asked everyone the same two questions,” said Vinny. “What is your assumption about home prices, and what is your assumption about loan losses.” Both rating agencies said they expected home prices to rise and loan losses to be around 5 percent – which, if true, meant that even the lowest-rated triple-B, subprime mortgage bonds crafted from them were money -good.” it was like everyone had agreed in advance that five percent was the number,” said Eisman. “They all said five percent. It was a party and there was a party line.” - an excerpt from the “Big Short”