A former analyst and Senior Vice President of Moody’s Investor Service, Ltd. — William Harrington — has given the SEC a 78-page comment on its proposed rules for regulating the ratings agencies such as Standard and Poor’s. Mr. Harrington does not think the rules will help much. But in the process of explaining why, he has accused his former employer of significant wrongdoing. Henry Blodget summarizes the key allegations:
The primary conflict of interest at Moody’s is well known: The company is paid by the same “issuers” (banks and companies) whose securities it is supposed to objectively rate. This conflict pervades every aspect of Moody’s operations, Harrington says. It incentivizes everyone at the company, including analysts, to give Moody’s clients the ratings they want, lest the clients fire Moody’s and take their business to other ratings agencies.
Moody’s analysts whose conclusions prevent Moody’s clients from getting what they want, Harrington says, are viewed as “impeding deals” and, thus, harming Moody’s business. These analysts are often transferred, disciplined, “harassed,” or fired.
In short, Harrington describes a culture of conflict that is so pervasive that it often renders Moody’s ratings useless at best and harmful at worst.
Harrington believes the SEC’s proposed rules will make the integrity of Moody’s ratings worse, not better. He also believes that Moody’s recent attempts to reform itself are nothing more than a pretty-looking PR campaign.
“Key highlights” include:
- Moody’s ratings often do not reflect its analysts’ private conclusions. Instead, rating committees privately conclude that certain securities deserve certain ratings–but 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.