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Who else to give credit for subprime?

Stephen Beard Aug 16, 2007


Doug Krizner: Will all this stress in the market produce a recession?

Treasury Secretary Hank Paulson told the Wall Street Journal the answer is no. He said the stress will “extract a penalty” on U.S. growth, but the global economy is very healthy. Paulson also told the Journal the government shouldn’t guarantee market players against losses.

You know, there’re agencies responsible for rating the credit quality of big borrowers. What’s their role in the subprime mortgage debacle? That’s what the European Commission wants to know. So the E.C. has started to investigate. From London, Stephen Beard reports.

Stephen Beard: European officials say that credit rating agencies like S&P and Moody’s have a case to answer over subprime. They claim the agencies failed to warn investors about the risks of the sector early enough. Some banks were sounding the alarm about mortgage-backed securities last year.

But the agencies only began downgrading them on a big scale this spring. And there are other concerns. Among them that the subprime mortgage market might not have grown so large if the credit ratings had not been so favorable.

And there’s another worry about a potential conflict of interest, says David Shellock of The Financial Times:

David Shellock: There could be a problem, because these rating agencies are actually employed by the banks issuing the securities, which are backed by subprime mortgages. Therefore, there might be a bias involved there.

The rating agencies not only face a European probe. Congressional hearings on their performance are due to begin next month.

In London, this is Stephen Beard for Marketplace.

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