Moody's wasn't alone in making mistakes · Transcript

WarrenI don't think the conflict of interest question was the biggest, anywhere close to the major cause of the shortcomings of the rating agencies in foreseeing what would happen with CDOs and CMBSs and all sorts of instruments like that. Basically, five years ago, virtually everybody in the country had this model in their mind, formal or otherwise, that house prices could not fall significantly. They were wrong. Congress was wrong. Bankers were wrong. People who bought the instruments were wrong. The borrowers were wrong. The borrowers were wrong. But people thought that if they were going to buy a house next year, they better buy it this year because it was going to be selling for more money the following year. And people who lent the money said it doesn't make any difference if they're lying on their application or they don't have the income because houses go up. And if we have to foreclose, we won't lose that much money. And besides, they can probably refinance next year and pay. So there was a almost total belief, and there was always a few people that disagreed, but there was almost a total belief throughout the country that house prices would certainly not fall significantly and that they would probably keep rising. And the people that the rating agencies, one way or another, built that into their system. And I really don't think it was primarily the payment system that created the problem. I think they just didn't understand the various possibilities of what could happen in a market, or in a bubble, really, where people leveraged up enormously on the biggest asset that most Americans possessed their house. And so you had a $20 trillion asset class in a $50 trillion of total assets of American families of 50 trillion that got leveraged up very high. And then once it started melding down, it had self-reinforcing aspects on the downside. So I say that they made a major mistake in terms of analyzing the instruments, but they made a mistake that a great, great, great many people made. And that probably if they had taken a different view, of residential mortgages four or five years ago they would have been answering to to congressional committees who would be saying, how can you be so an American as to deny all these people the right to buy houses simply because you won't rate these securities higher.