Treasury select committee member Jesse Norman says credit ratings agencies and American banks engaged in a “racket” over structured product ratings and made large profits as a result.
Norman made the accusation during a committee hearing with Moody’s, Fitch, Standard and Poor’s and DBRS last week.
Quizzing Moody’s managing director Frederic Drevon, Norman said agencies should have known about the poor quality assets in some structured products if they had been doing its credit analysis properly.
Norman said: “There was an enormous profit stream to US banks from taking goodness knows what quality assets, bundling them together into structured product and asking you guys to bless them. You played along because the money was so good. Do you not share my view this was a racket?”
Drevon said: “We developed methodologies which included an expectation these were loans of average to very poor quality. The transactions were in fact structured in such a way to address the risk that we and the market anticipated but we underestimated the magnitude.”
Select committee chair Andrew Tyrie said 50 per cent of Moody’s income in 2005 came from rating structured products.
He said: “People close to this market have told me it was a revenue stream that was too good to be true.”