Christopher Cox Reuters file Christopher Cox on Tuesday said he has asked for an investigation into how Madoff's alleged $50 billion Ponzi scheme went undetected despite repeated "credible and specific allegations" made to SEC staff since at least 1999. The nation's largest credit-rating agencies failed to protect investors during the real estate boom because of sloppy business practices and inadequate staffing, federal regulators said in a report issued Tuesday. An investigation by the Securities and Exchange Commission, launched 10 months ago because of the subprime mortgage meltdown, says the big three ratings firms — Moody's, Standard & Poor's and Fitch — struggled to keep up with the workload of rating an ever-increasing number of mortgage-backed securities from 2002 to 2007. As a result, all three lowered their standards in rating complex investments known as residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs). Because many institutional investors can put money into only investment-grade bonds (i.e., bonds with a rating of "AAA"), investment banks scrambled to win the highest ratings for the mortgage-backed securities they developed during the real estate bubble. When the subprime mortgage crisis erupted last year, bondholders demanded to know why so many of these securities, constructed with toxic subprime mortgages, had been awarded "AAA" ratings. The SEC said that happened because: •Starting in 2002, as the real estate boom accelerated, the ratings agencies didn't hire enough staff to keep up with an ever-increasing workload. •The firms did not keep clear records for why they deviated from established ratings methods in slapping "AAA" designations on questionable securities. •Once they rated an investment product, the firms did not track the performance of those securities closely, so that when foreclosures skyrocketed last year, many RMBS and CDOs still had investment-grade ratings. •The ratings agencies did not do a good job managing conflicts of interest. Instead, the analysts charged with rating the bonds were often aware that slapping a ranking of "AAA" onto a product would improve the financial success of their firms. The SEC report backed up some of its assertions with copies of e-mails, though it would not identify the senders. In one, an unnamed analyst complained that her agency's methodology didn't capture "half" of the risk of a particular security, adding, "It could be structured by cows, and we would rate it." A manager at the same firm wrote that his agency was "creating an even bigger monster, the CDO market. Let's hope we are all retired and wealthy before this house of cards falters." SEC Chairman Christopher Cox announced the findings Tuesday in Washington, D.C. On a positive note, he said the ratings agencies' "problems are being fixed in real time." But one longtime critic of the ratings agencies didn't agree. "There was an utter failure and breakdown of control in these companies, and the SEC failed to catch any of it," said Joshua Rosner, managing director of Graham Fisher. "I'm certain there's a hell of a lot more incriminating e-mails," he said. "The SEC is glossing it over." As for the ratings agencies that the SEC examined, Moody's and S&P each issued statements Tuesday pledging support for industry reforms and declaring their commitments to transparency in the marketplace. Fitch also praised the commission's reform efforts, adding, "The SEC has not informed Fitch of any finding that Fitch acted in a manner inconsistent with Fitch's code of conduct." Guidelines: You share in the USA TODAY community, so please keep your comments smart and civil. Don't attack other readers personally, and keep your language decent. Use the "Report Abuse" button to make a difference. You share in the USA TODAY community, so please keep your comments smart and civil. Don't attack other readers personally, and keep your language decent. Use the "Report Abuse" button to make a difference. Read more