If you did not have time to watch the FCIC hearings last Wednesday, we strongly encourage you to read the following testimony. It describes in great details the changes in the business culture of Moody’s and the means to achieve these changes. The testimony also clearly shows that when wrong-doing/fraud is present it is sometimes very hard to catch it given the complexity of the transactions so “Please keep that in mind when people suggest to you that the acts of explicit wrong-doing have been relatively rare.”
Here is an excerpt:
“In conclusion, I have tried to show that Moody’s managers deliberately engineered a change to its culture intended to ensure that rating analysis never jeopardized market share and revenue. They accomplished this both by rewarding those who collaborated and punishing those who resisted. In addition to intimidating analysts who did not embrace the new values, they also emboldened bankers to resist Moody’s analysts if doing so was good for Moody’s business. Finally, I have tried to provide you with an example of the extent to which the new culture corrupted the rating process. The adjusted European CLO Rating Factor Table appears to have been adopted for the sole purpose of preserving Moody’s European CLO market share despite the fact that it might have resulted in Moody’s assigning ratings that were wrong by as much as one and a half to two notches. As I indicated to Moody’s outside counsel in the summer of 2008, every single investor in a Moody’s rated European CLO may have a claim against Moody’s for damages associated with the fact that their CLO investments were not priced correctly.”
Hat tip: Eric Tymoigne
