Pointing the Finger

The rating agencies, after weeks of taking heaping abuse, this week slashed ratings and earlier forecasts on deteriorating subprime loans and reassessed billions of dollars of debt, much of which had received a clean bill of health due to their rosy outlooks for U.S. housing.

Standard & Poor's cut ratings on $6.4 billion of debt and Moody's Investors Services downgraded $5.2 billion. Both now project losses for subprime loans originated in 2006 to reach as high as 14 percent, more than double at the start of the year.

But S&P, Moody's and Fitch Ratings reveled during the boom years when credit raters stoked record growth in a $1 trillion debt market that included CDOs and the underlying subprime loans. The newfangled bonds contributed to as much as half of the raters' total revenue growth.

A growing chorus of critics say raters were irresponsible in giving their stamp of approval to bonds that should have been rated much lower.

"This is like selling liquor to a minor without carding them, or selling a hand gun and saying they're not being used to kill people," said Joseph Mason, an associate professor of finance at Drexel University in Philadelphia. "They are selling these ratings, and the label says don't use it for investment purposes. That's clearly not the case."

Mason, who co-authored a study detailing the risks of subprime loans and CDOs, says rating companies are involved in much more than just rating securities.

They work intimately with the underwriting team to determine the size of each tranche, or groups of rated debt, and are active in the entire structuring of CDOs to achieve a rating target, he said.

S&P, Moody's and Fitch have declined to comment. They have argued that they offer opinions and not investment advice.

WALL STREET REACHING FOR PROFITS

Subprime lenders provided the raw material for Wall Street to manufacture securities products snapped up by pensions, hedge funds and other institutional investors. Critics say the emphasis was on pumping out volume, not quality.