GAMING THE SYSTEM

How Banks Duped Credit Raters

Tinkered with rating agencies' formulas to achieve high scores.

Investors were shocked during the financial crisis to find their mortgage-backed securities were nearly worthless—after all, they'd been told by venerable credit rating agencies like Moody's and Standard and Poor's that they were sound investments. So how did the raters blow it? The New York Times reports that the major banks hired former workers at the agencies and took advantage of publicly available formulas used by the raters to tinker their products to the test. For example, one tactic was to include small amounts of commercial real estate to give the impression under the raters' formulas that the derivatives included a more diverse set of mortgages than they actually did. “If you dug into it, if you had the time, you would see errors that magically favored the banker,” one former ratings executive told the Times. “If they had the time, they would fix it, but we were so overwhelmed.”