S&P, Moody's Inflated MBS Ratings: Report

NEW YORK (TheStreet) -- Moody's Investors Service(MCO) and Standard & Poor's manipulated the credit ratings of mortgage-backed securities because of bank industry pressure until they eventually downgraded the structures, prompting the 20008 financial crisis, according to a congressional report issued Thursday.

A report by the Senate Permanent Subcommittee on Investigations says UBS(UBS), Lehman Brothers Holdings, Citigroup(C), Bear Stearns, Morgan Stanley(MS), Goldman Sachs(GS), JPMorgan Chase(JPM) and Nomura Holdings all asked the rating agencies to loosen standards, even though S&P and Moody's knew of the risky nature of the bonds.

"Credit rating agencies were paid by the Wall Street firms that sought their ratings and profited from the financial products being rated... the ratings firms were dependent upon those Wall Street firms to bring them business and were vulnerable to threats that the firms would take their business elsewhere if they did not get the ratings they wanted," the report said. "The ratings agencies weakened their standards as each competed to provide the most favorable ratings to win business and market share."

The report also states that "the most immediate cause of the financial crisis," was the July 2007 downgrade by Moody's and Standard & Poor's of several mortgage-backed securities. At that time, 90 percent of the triple A rated mortgage-backed securities issued in 2006 and 2007 were downgraded to junk status.

The downgrade caused pension funds, insurance companies and banks to scramble to sell off the securities, which led to the subprime market collapse, the report states.

Calls to S&P and Moody's for comment were not immediately returned.

--Written by Maria Woehr in New York.

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