Saturday, May 3, 2008
The Ratings Game
"Bond-rating agency Moody's Investors Service used to be an ivory tower of finance. Analysts were discouraged from having a drink with a client. Phone calls from bankers went unanswered if they rang during intense, almost academic debates about credit ratings. ... A firm once known for its bookish culture began to focus on the market share that affected its own revenue and profit. The rating firm became willing, on occasion, to switch analysts if clients complained. ... Moody's acknowledges it sometimes got things wrong in judging mortgage bonds, but says these were honest mistakes and not the result of efforts to garner market share. It says it has maintained its rigor and objectivity in a rating process that is still adversarial toward big investment banks. ... Brian Clarkson [BC] ... maintains that his focus on making Moody's friendlier to Wall Street was what the company needed early this decade. 'We're in a service business,' he says. 'I don't apologize for that.' ... Bond issuers, knowing that a higher rating means they pay a lower interest rate, have an incentive to shop around among rating agencies. ... In 1996 ... Clarkson took over the group at Moody's that analyzed [mortgage securities]. The firm added new analysts and overhauled its ratings approach, allowing for higher ratings in the area. ... In 1999 Mr. Clarkson ... shook things up, firing or reassigning about two dozen analysts, and hiring new ones who started giving higher grades under a new methodology. ... Paul Stevenson a former Moody's executive who now works at BMO Financial Group [said] 'the most recent problem .. is that the rating process became a negotiation.' ... Mark Froeba, a former Moody's analyst says, 'There was never an explicit directive to subordinate rating quality to market share. There was, rather, a palpable erosion of institutional support for rating analysis that threatened market share. ' ... Clarkson says ... 'we don't change methodology to garner market share.' ... On occasion, Moody's agreed to switch analysts on deals after bankers complained. ... Clarkson's structured-finance group grew to account for 43% of Moody's revenue in 2006. ... Since becoming Moody's president in August, [BC] is spending up to half of some weeks dealing with regulators. 'They want the same things we do,' he says. ... Clarkson says analysts have kept their 'adversarial' approach, but adds, 'One of the things we have to do going forward is be more skeptical'," , my emphasis, WSJ, 11 April 2008.
BC, I agree, Moody's "services" the public as a bull does a cow. Why hasn't the SEC adopted the CPA firm change 8-K reporting requirement to the rating agencies? The SEC has plenty of regulatory powers. Here's another 8-K idea for you Chris Cox (CC): make any Wall Street house request of a rating agency to change an already assigned analyst, or to avoid an analyst to be assigned, be submitted to your enforcement people. In writing, within 72 hours. A failure to submit the writing being securities fraud. With the analyst able to respond in writing. And the rating agency told any retaliation against the analyst might lead to an indictment under 18 USC 1513. Well CC, well Mark Olson? How about it? Will the SEC force something effective on the ratings agencies? Will the SEC push the DOJ to indict BC for securities fraud, if he knowingly induced his employees to issue higher ratings to "game the system"? Well? Or would this irritiate the large investment banks? Now, CC, you don't want to do that. Do you? "A negotiation". How interesting. Hey Mike Garcia, could you ignore some nickel and dime (ugh) crack dealers for the next few months and draft an indictment here for conspiracy to commit securities fraud? If you snare enough Wall Street Managing Directors, New York's next Governorship might be yours. The most interesting thing BC said was that the regulators "want the same things we do". To protect large investment banks?