It’s open season on the credit rating agencies, and at least one former Moody’s (MCO) executive is doing the shooting.
William Harrington, until 2010 a senior analyst in the firm’s derivatives group, accuses Moody’s of everything from tailoring its securities ratings to suit financial industry clients to lying to lawmakers about the company’s actions.
As Business Insider summarizes his accusations, which are disclosed in a 78-page formal comment letter to the SEC regarding proposed rules affecting the rating agencies:
Moody’s ratings often do not reflect its analysts’ private conclusions. Instead, rating committees privately conclude that certain securities deserve certain ratings–and then vote with management to give the securities the higher ratings that issuer clients want.
Moody’s management and “compliance” officers do everything possible to make issuer clients happy — and they view analysts who do not do the same as “troublesome.” Management employs a variety of tactics to transform these troublesome analysts into “pliant corporate citizens” who have Moody’s best interests at heart.
Moody’s product managers participate in — and vote on — ratings decisions. These product managers are the same people who are directly responsible for keeping clients happy and growing Moody’s business.
At least one senior executive lied under oath at the hearings into rating agency conduct. Another executive, who Harrington says exemplified management’s emphasis on giving issuers what they wanted, skipped the hearings altogether.
Rotten to the core? You don’t say
Conflicts of interest? Sucking up to Wall Street? Dodging accountability? Tell us something we didn’t know, Bill! Harrington’s justified disgust with Moody’s also begs the question of why he stayed at the firm for more than a decade. The last four of those years were spent within the company’s structured finance unit, which rubber-stamped dodgy mortgage-backed securities with AAA ratings. In the letter he even says he remains “extremely proud” of his work at Moody’s.
Uh, why? Once upon a time, it meant something for a security to be rated AAA — namely, that there was less than a 1 percent chance it would blow up. But during the housing bubble that designation came to be meaningless, as Moody’s, Standard & Poor’s and Fitch effectively rented out their ratings to Wall Street firms selling subprme MBS and collateralized debt obligations. When the financial crisis struck, the vast majority of these securities incurred big losses, while some completely vaporized. Why did the raters do it? Easy: Big banks paid them to.
None of which undermines Harrington’s credibility one bit. Quite the opposite. Everyone from lawmakers in Washington, to conservative think-tankers, to academic experts have correctly pointed to this conflict of interest as a contributing factor in the meltdown. But to my knowledge no credit rating exec, past or present, has come forward to describe the firms’ defective business model in such detail.
As Harrington’s letter suggests, this isn’t simply a tale of corruption. Other factors come into play: analyst incompetence, defective ratings models, sloppy management, Wall Street corruption — all compounded by the U.S. government effectively allowing the major ratings agencies to operate an industry cartel.
Harrington doesn’t think the government’s reform proposal, which stops short of eliminating the rating firms’ “pay to play” relationship with the Street, will work. He may be right. As the recent brouhaha over S&P’s downgrade of U.S. Treasuries shows, these companies retain too much influence and too little integrity. That must change for our financial system to heal.