WASHINGTON – Former executives at the nation’s major credit-rating companies told a Senate panel Friday that a pressure-cooker culture fostered by top managers encouraged them to cut corners so their firms could handle an exploding volume of deals and keep raking in profits during the bubble years.

The testimony backs the findings of a probe by the Senate Permanent Subcommittee on Investigations. The probe concluded that these firms used outdated models, gave high ratings to flimsy investment vehicles, and waited too long to downgrade those investments in part because they were unduly influenced by their Wall Street clients and their own quest to make more money.

Investors relied on the ratings companies to impartially gauge the risk of complex deals tied to home mortgages. But the firms failed to do that, and the ensuing downgrade of hundreds of mortgage-backed securities in mid-2007 “shocked financial markets” and “the financial crisis was on,” said Sen. Carl Levin, D-Mich., head of the Senate panel.

Financial regulatory overhaul legislation before Congress aims to increase oversight of the ratings industry to prevent such a collapse in the future.

Frank Raiter, a former managing director at Standard & Poor’s, told lawmakers about a disconnect between senior managers who were trying to boost profits, and analytical managers who were striving to improve risk assessment.

Raiter said many of his colleagues quit their jobs after trying to “fight the good fight.” Many were frustrated after their pleas for tighter controls fell on deaf ears, said Raiter, who retired in 2005.

In defense of the ratings companies, current executives said their firms took the actions they thought were appropriate at the time. Ray McDaniel, chief executive of Moody’s Investors Service, said his company is “not satisfied with the performance of our ratings” during the boom years, but “neither we — nor most other market participants, observers or regulators — fully anticipated the severity or speed of deterioration” in the housing and credit markets.

Yuri Yoshizawa, senior managing director at Moody’s, said she does not remember retaliation against analysts who were critical of deals.

“I do not remember an instance where I took somebody off because the bank complained about their performance or because they were upset about some of the things that they may have said,” Yoshizawa said.

But one former official at her firm, Richard Michalek, told of a different climate. Michalek described a “quantity-over-quality” mentality that rewarded analysts who accommodated clients and pushed out others who meticulously documented deals and asked probing questions.

Most of the former officials who testified said their firms were chasing after market share and short-term profits.


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