What caused the recent Wall Street meltdown? Why were so many in the financial world bamboozled into buying up risky mortgage-backed securities and other collateralized debt? Some answers came to light during the October 22 Congressional hearings.

Even though there are never any guarantees, a triple-A rating can make an investment sound like a pretty sure bet. But when the financial companies issuing the securities are also paying the credit rating agencies to set the ratings, conflicts of interest can skew the odds.

That’s why Standard & Poor’s and Moody’s, two major credit rating agencies, came under fire from Henry Waxman, House Oversight and Government Reform Committee Chairman.  As Waxman put it, “The credit rating agencies occupy a special place in our financial markets. Millions of investors rely on them for independent, objective assessments. The rating agencies broke this bond of trust, and federal regulators ignored the warning signs and did nothing to protect the public.”

As Wall Street events have unfolded over the past several months, it’s become obvious that rating agencies had severely underestimated just how risky the complex mortgage-back securities were. Waxman accused credit rating agencies of colossal failure in their quality assessments of the investment vehicles that loomed large in the financial crisis, saying, “Unfortunately for investors, the triple-A ratings that proved so lucrative for the rating agencies soon evaporated.”  

The Congressional hearing was the latest in a series of meetings that are delving into the causes underlying the crisis and examining a likely overhaul of regulations to avoid a repeat of the events that led to the unraveling of the financial markets.  

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