Ratings Agencies to Face Grilling on Goldman

A Senate report Thursday said the agencies that rate investments deserve some of the blame for the financial meltdown. According to that report, those agencies helped banks disguise the risks of the investments they marketed, selling high-risk securities with low-risk labels.

Fallout from the Securities and Exchange Commission's fraud case against Goldman Sachs is now drifting in the direction of the credit rating agencies that blessed the controversial deal, reports CBS News Chief Investigative Correspondent Armen Keteyian.

Executives from agencies Moody's and Standard & Poor's will testify on Capitol Hill Friday, expecting to be grilled about their pivotal role in the fraud case, which sparked renewed questions about their role in the financial meltdown.

(Note: CBSNews.com will stream Friday's live testimony from executives of Moody's and Standard & Poor's. The hearing is scheduled to begin at 9:30 a.m.)

"The credit rating agencies failed completely," said Sen. Bernie Sanders, I-Vt. "You had a totally intentionally created toxic asset."

On paper it was known as "abacus 2007-AC1," a billion-dollar bet that the people living in certain homes and others were headed for foreclosure or default.

The SEC alleges Goldman Sachs helped hedge fund manager John Paulson win that bet by loading abacus up with hundreds of thousands of low-quality loans, including "a high percentage of adjustable rate mortgages" and buyers with "relatively low...FICO (or credit) scores"

Yet when those toxic loans were presented to investors, they smelled more like French perfume. One big reason why is the deal received the highest possible credit rating - stamped triple-A - by the top two agencies, Moody's and Standard & Poor's, meaning it should have been a safe investment.

"Investors, at least back in 2007, gave a lot of credence and have a lot of faith in the triple-A rating," Jack Chen, a former Moody's analyst, said.

The problem? Ratings agencies are paid by the people who create the products, a conflict of interest akin to movie critics collecting checks from studios to review films.

"The truth is they are working for Wall Street, and they're going to give Wall Street what Wall Street wants," Sanders said.

Both Moody's and Standard & Poor's declined to comment. The new financial reform bill will seek stronger regulation and more transparency, but in the end, it appears, it will do little to change the way the ratings game is played.

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