In a report released yesterday on what went wrong at the ratings agencies responsible for grading instruments tied to subprime debt, the Securities and Exchange Commission found a breakdown in communications.


As the number of complicated securities tied to subprime mortgage debt soared, particularly collateralized debt, the big three ratings agencies—Moody’s, Standard & Poor’s and Fitch—often didn’t add enough staff. And if analysts on hand sounded concern, they were often ignored.


One analyst lamented, according to a report in The Wall Street Journal, CDO deals were becoming so complex, the ratings firm’s models were inadequate to measure them. Deals, the analyst said, “could be structured by cows, and we would rate it.”


In another frank exchange, a credit-rating manager confesses the business of rating CDOs had become a “monster. Let’s hope we are all wealthy and retired by the time this house of cards falters.”


In addition, the SEC found a lack of documentation and proper risk surveillance at the ratings agencies, although it didn’t disclose specifics for any one firm.

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