Uncovering the truth

Opinion: October 15, 2010 at 12:00a.m.

Milwaukee Journal Sentinel: New testimony has cast even more doubt — if that’s possible — on the actions of ratings agencies that were supposed to be analyzing risk as the mortgage securities market bubble was inflating.

The new information came in testimony last month before the Financial Crisis Inquiry Commission, which Congress created last year to investigate the financial meltdown that triggered the worst recession in decades in the United States.

D. Keith Johnson, the former president of Clayton Holdings, told investigators that about half the mortgages the firm sampled did not meet the very benchmarks that Wall Street banks had promised investors, The New York Times reports. Clayton, a Connecticut-based firm, assessed the riskiness of mortgage pools for the banks.

Johnson said that 28 percent of the loans sampled were complete failures, but about 40 percent of even these poorest of the poor were included in mortgage pools that eventually were sold to investors.

According to the Times, Johnson also testified that he alerted the major bond-rating agencies to what Clayton had found but claims the agencies failed to act on the information. The agencies, he told the commission, were concerned about losing business.

In a letter to the commission, Clayton’s current chief executive said the firm never shared its reports with the ratings services. “These statements were inaccurate,” Paul T. Bossidy wrote to the commission on Sept. 30.

Suspect practices

It’s hard to know whom to believe. But we know this much: Suspect practices in the mortgage securities market led to a broad financial crisis two years ago and an economic trough in which the nation still languishes.

Financial reform legislation signed into law by President Barack Obama in July addressed some of the problems; investors now have the right to sue credit ratings agencies if those agencies “recklessly” failed to do their jobs.

But even after passage of that bill, it is vital that the American public learn as much as possible about the events leading up to the September 2008 meltdown of financial markets.