Conflict of Interest

The House Oversight Committee held a hearing yesterday that isn’t making much noise in the press.  With the Dow on a roller coaster ride that won’t end, it’s easy to miss news and other noteworthy items.  In fact, the news flow of late has been so strong, not to mention in the middle of earnings season, that it’s likely every one of us to be pre-occupied with other matters.

But see this juicy text message exchange between two individuals from Standard and Poor’s regarding a mortgage backed deal they were covering in April of 2007:

Official #1: Btw, that deal is ridiculous.

Official #2: I know right…model def does not capture half the risk.

Official #1: We should not be rating it.

Official #2: We rate every deal. It could be structured by cows and we would rate it.

Nothing more needs to be said does it?!

But wait, there’s more!  I click forward and find the following Bloomberg article, which has the little tidbit:

The Securities and Exchange Commission in a July report found the credit-rating companies improperly managed conflicts of interest and violated internal procedures in granting top rankings to mortgage bonds.

An e-mail that a S&P employee wrote to a co-worker in 2006, obtained by committee investigators, said, “Let’s hope we are all wealthy and retired by the time this house of cards falters.”

Doesn’t that make your blood boil!  The good news:  The conflicts of interest embedded in the system are finally being flushed out.  However, it won’t disappear all together.  There will always be unscrupulous individuals and entities.  I can only hope that all investors will finally come to grips with adequately assessing what risk and reward means.

Good Luck.