The Stash

Have the Ratings Agencies Taken Enough Flak?

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You read something like this and you kinda maybe start to think the ratings agencies are, if far from blameless, then perhaps a necessary evil. But then you go and read something like this piece in yesterday's Wall Street Journal and you're embarrassed for having entertained the thought.

Per the Journal:

Despite months of regulatory scrutiny and some internal changes at the firms, a recently departed Moody's Corp. analyst says inflated ratings are still being issued. ...

The analyst, Eric Kolchinsky, said Moody's Investors Service gave a high rating to a complicated debt security in January 2009 knowing that it was planning to downgrade assets that backed the securities. Within months, the securities were put on review for a downgrade. ...

In December, according to internal memos reviewed by Mr. Kolchinsky, Moody's executives approved changes to their ratings methodology that they expected to lead to the downgrades of many securities backed by corporate loans. The notes issued in January were tied to those types of securities, but Moody's analysts still gave the deal a high rating. ...

In mid-December, Moody's analysts and managers had come to the conclusion that the bulk of CLOs would be downgraded to reflect new default assumptions, according to internal memos viewed by Mr. Kolchinsky. One December email he reviewed said those rated double-A and below were likely to be downgraded by three to six "notches."

Right. So a business in which the rate-er gets paid by the rate-ee turns out to be about as sketchy as you thought--it just isn't that complicated. (This is, after all, the industry that brought us, "It could be structured by cows and we’d rate it.”)

P.S. One priceless nugget from the Journal piece:

A year later, Mr. Kolchinsky filed an internal complaint with Moody's, citing "retaliation" against him. A Moody's spokesman says that the firm "has a strict nonretaliation policy" and that Mr. Kolchinsky "has made an evolving series of claims of misconduct within the company and we have conducted multiple separate reviews." [emphasis added.]

Hmmm. Any firm that feels it needs a "strict nonretaliation policy" does not strike me as a place where such a policy would be especially reassuring. They might as well call it a "strict doth-protest-too-much policy."

P.P.S. Kolchinsky is apparently testifying before the House Government Reform Committee today, along with at least one industry representative. Should be good television.

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