Friday, December 19, 2008
31 More Years?-4
"'These errors make us look either incompetent at credit analysis or like we sold our soul to the devil for revenue, or a little bit of both.' --A Moody's managing director responding anonymously to an internal management survey, September 2007. ... Moody's, which judges the quality of debt that corporations and banks issue to raise money, had just graded a pool of securities underwritten by Countrywide Financial, the nation's largest mortgage lender. But Countrywide complained that the assessment was too tough. The next day, Moody's changed its rating. ... That was not the only time Moody's softened its stance on Countrywide securities. It elevated ratings several times after Countrywide complained, the people briefed on the matter say. ... A Moody's spokeman, Anthony Mirenda, said ... 'Moody's knows of no instances in which a reconvened rating committee resulted in improper changes to ratings on Countrywide securities.' ... 'Moody's credit ratings play an important but limited role in the financial markets--to offer reasoned, independent, forward-looking opinions about relative credit risk, based on rigorous analysis and published methodologies,' Mr. Mirenda said. The company denies that it went easy on ratings to generate income. ... 'If you can't figure out the loss ahead of the fact, what's the use of your ratings,' asked an executive with Fortis Investments, a money management firm, in a July 2007 e-mail message to Moody's. 'You have legitimized these things, leading people into dangerous risk.' ... Edmund Vogelius, a Moody's vice president, explained the company's business model in a 1957 article in The Christian Science Monitor. 'We obviously cannot ask payment for rating a bond,' he wrote, 'To do so would attach a price to the process, and we could not escape the charge, which would undoubtedly come, that our ratings are for sale.' ... [Thomas] McGuire, the former director of corporate development at Moody's [said] 'Rating agencies are staffed by ordinary people with families to support and bills to meet and mortgages to pay,' he said in a speech to the S.E.C. in 1995. 'Government regulators are inadvertently subjecting those people to improper pressure, and share accountability for any scandals which may result.' ... 'The mistaken notion that Moody's was a company like any other, that was very fundamental,' said Sylvain Raines, a former Moody's analyst who is co-founder of R&R Consulting, a firm that helps investors guage debt risks. 'It is not just a profit-maximization entity like Exxon or Microsoft, Moody's has a duty to the American public. People trusted it'," my emphasis, Gretchen Morgenstern (GM), 7 December 2008 at http://www.nytimes.com/.
I am sure Mirenda is telling the truth. As long as Moody's is paid, any rating changes are by definition, proper. As I've said before, the rating agencies suffer from the same classical agency problem as CPA firms. Fixing the problem will require the same medicine in both cases.