(Washington, DC) - U.S. Rep. Gary Ackerman (D-Queens/L.I.), a Senior Member of the House Financial Services Committee, today made the following opening statement during a a hearing held by its Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises, a penel the Congressman serves on as well. The hearing was entitled “Recent Events in the Credit and Mortgage Markets and Possible Implications for U.S. Consumers and the Global Economy.”

“Mr. Chairman, much of the blame for the current economic mess can surely be placed on the shoulders of the subprime mortgage business.  Too many brokers sold these complex and inherently risky financial products to people who had no business being approved for black and white TV loans, let alone six-figure mortgages.  A handful of these institutions even went so far as to offer mortgages with the promise of “no background checks,” and “no income verification,” and advertised in low-income areas saying that no one could be turned down for a loan.  In my view, such business practices, very clearly designed to bait the hook at the American dream, to entrap economically strapped and often less-financially savvy customers into mortgages that they could not afford, were not simply irresponsible; they were reprehensible if not criminal.

But there’s still more blame to be apportioned.  Loan originators took these junk mortgages, packaged them into securitizations, and then marketed the collateralized debt obligations, or CDOs, on the secondary mortgage market after absent transparency.  We now know that credit rating agencies, by their own admission, assigned overly-favorable ratings to many of these products.  The why of it is very simple:  some of these firms were double-dipping. First they profited by helping the originators put these shady securities together, and then they collected fees for deliberately mis-rating these risky products at a higher value than they were worth.  This is what the Arthur Andersons did for the Enrons and the Worldcoms.  The credit raters helped put the Spam in the can, made it sizzle, then they helped sell it as steak. As I noted at a hearing earlier this month, that's not the free market at work.  That's fraud.  And fraud is a crime, not a correction.

Now, nobody here today will argue that the ratings assigned by Moody’s or S&P are the sole factor investors used when deciding whether or not to purchase a securitization.  In fact, many sophisticated investors voiced their concerns about CDO products when the subprime lending spree hit its peak about two years ago. But nobody can deny that credit ratings played a major role in many investors' decisions.  And my concern here is not that Wall Street players lost money because good-faith credit ratings turned out to be bad estimates of risk.  The outrage here is that the credit rating agencies colluded with loan originators and then consciously assigned overly favorable ratings to deliberately manipulate the market for their own greedy profit.  Collusion and misrepresentation are not elements of a genuinely free market.

It is the job of the federal government to protect the integrity of our markets and as I said last month, this Committee and this Congress will not be passive spectators as banks and credit-rating agencies use their control of information to fool investors into believing that a pig is a cow and a rotten egg is a roasted chicken. I am pleased that we have some witnesses from the credit rating agencies with us this afternoon. I'm hoping their testimony will merit a triple-A rating. In light of their industry's recent perfomance, something closer to 'C' or lower is probably more likely.  I would warn them that their honesty today about where their industry went wrong, and what steps they are taking to ensure that unduly-favorable ratings are not given to shaky financial products in the future, may determine their future earnings--or losses.

I yield back the balance of my time.”

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