Everyone was pinning their hopes on house prices continuing to rise . . . When they stopped rising, pretty much everyone was caught on the wrong side, because the sensitivity to house prices was huge. And there was just no getting around it. Why didn’t rating agencies build in some cushion for this sensitivity to a houseprice-depreciation scenario? Because if they had, they would have never rated a single mortgage-backed CDO.
Between september 2004 and october 2007 Standard and Poor's applied credit ratings to some $2.8 Trillion of mortgage backed securities and $1.2 Trillion of CDOs. It may be they deliberately put generous ratings on the securities just to get the business and this is a possibility. Certainly the Department of Justice now seems to be keen to impose fines (as much as $5 billion !) see Bloomberg link on them and both Standard and Poor's and Moody's shares fell close to 14% and 11% respectively yesterday as news about a failure to settle with the DoJ broke see Bloomberg Story link. The following Bloomberg video is also worth a watch!