REGULATORS on both sides of the Atlantic are combing e-mail records to investigate the role of credit-rating agencies in the sub-prime loan crisis.

Although house prices were no longer booming in December 2006, “sub-prime mortgage” had yet to become a familiar term. It would be a few months before the risky-loans business would implode, with borrowers facing ruin, banks teetering on the brink of collapse and stock markets reeling worldwide.

At the credit-rating agencies that did so much to prop up the sub-prime industry, someone seemed to have a clear sense of what was coming. “Let’s hope we’re all wealthy and retired by the time this house of cards falters,” an analyst wrote in a candid e-mail to a colleague.

That e-mail and dozens like it were disclosed last week in a 37-page report by America’s top financial watchdog, the Securities and Exchange Commission (SEC). In the corporate world, scandals have shown that when it comes to communications e-mails are deadly.

The last time Wall Street experienced a boom and bust as big as the credit crunch was in the millennial dotcom frenzy. That, too, ended with a series of e-mails exposing Wall Street’s double standards. Eliot Spitzer, the former New York attorney- general, became adept at turning internal company e-mails into deadly weapons, exposing Wall Street’s supposedly neutral analysts as corporate shills. In one famous example, Merrill Lynch was publicly promoting Life Minders.com, an online diary/address-book service, as “an attractive investment”, yet the firm’s internet analyst Henry Blodget sent an e-mail that said: “I can’t believe what a POS [piece of shit] that thing is.”

Independent research had gone out of the window, argued Spitzer, as analysts were used to promote worthless firms so their investment-banking colleagues could reap fees flogging them to the public. It seems that little has changed.

Investors place billions on the recommendation of credit-ratings agencies, trusting that the information is accurate and impartial. Many of those top-notch AAA ratings have recently proved worthless as many a highly rated investment has been exposed as — to borrow Blodget’s term — a POS.

The SEC report confirmed what many on Wall Street had long suspected: analysts at the major ratings firms, including Fitch, Moody’s and Standard & Poor’s, were entangled in compromise, considering company profits when rating securities and other suspect practices.

The report said analysts were overwhelmed by their workload and as the sub-prime and risky-credit market took off, so corners were cut.

“It could be structured by cows and we would rate it,” an analyst wrote in April 2007, noting that she had been able only to measure “half” a deal’s risk before providing a rating.

Dotcom e-mails led to a series of prosecutions and expensive shareholder law suits. Legal experts say ratings agencies may prove harder to sue but that will not stop people trying or stop politicians calling for blood. European regulators are already planning tighter controls.

Standard & Poor’s has said it is “fully committed to increasing openness” and to taking steps to improve its practices.

“The invention of the e-mail is the biggest advancement in law enforcement since the two-way police radio,” said John Coffee, professor at Columbia Law School, New York. “It constantly gives data you would not get anywhere else. People put into writing with e-mails what they would say orally but would not dare write formally.”

He said e-mails made possible prosecutions that otherwise would be impossible. “People don’t think about litigation. They don’t think that three years from now a grand jury is going to be investigating.”

The ratings-agency fiasco is the second time e-mails have provided the smoking gun for regulators investigating the credit crunch.

The electronic trail looks even worse for the two Bear Stearns hedge-fund managers being pursued by the Justice Department. Matthew Tannin and Ralph Cioffi, formerly senior managers of two hedge funds run by Bear Stearns that failed last year, have been charged with wire fraud, conspiracy and securities fraud and misleading investors about the rapidly tanking value of their two funds. Prosecutors say the charges are backed up by a personal e-mail sent from Tannin to Cioffi that allegedly shows they knew the two hedge funds were struggling yet later assured investors that the funds were stable.

On April 22, 2007 Tannin expressed concerns to Cioffi about the complex bond securities (collateralised-debt obligations or CDOs) the pair were trading. “If is correct, the entire sub-prime market is toast,” he is alleged to have said.

The two portfolios collapsed last July and their failure cost investors almost $2 billion.

Really hot mail

WHEN Claire Swire sent a saucy e-mail to her then boyfriend Bradley Chait at London law firm Norton Rose, her message was forwarded to some of his friends, who then sent it around the world.

Solicitor Richard Phillips of Baker & McKenzie got short shrift when demanding £4 for dry-cleaning from a secretary who spilt ketchup on his trousers.

CC-ing her reply as far and wide as possible, she shamed him. “Due to my mother’s sudden illness, death and funeral, I have more pressing issues than your £4,” she told all.

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