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McClatchy: Moody's Too-Favorable Ratings Fueled Wall St. Bubble
By Susie Madrak Sunday Oct 18, 2009 10:00am
http://crooksandliars.com/susie-madrak/mcclatchy-moodys-favorable-ratings-fu


The next time some bobblehead starts talking about how this crisis "is
about people living beyond their means", remind them of this latest proof
that the financial services industry was thoroughly and aggressively
corrupt, and that was a much bigger problem:

WASHINGTON -- As the housing market collapsed in late 2007, Moody's
Investors Service, whose investment ratings were widely trusted, responded
by purging analysts and executives who warned of trouble and promoting
those who helped Wall Street plunge the country into its worst financial
crisis since the Great Depression.

A McClatchy investigation has found that Moody's punished executives
who questioned why the company was risking its reputation by putting its
profits ahead of providing trustworthy ratings for investment offerings.

Instead, Moody's promoted executives who headed its "structured
finance" division, which assisted Wall Street in packaging loans into
securities for sale to investors. It also stacked its compliance department
with the people who awarded the highest ratings to pools of mortgages that
soon were downgraded to junk. Such products have another name now: "toxic
assets."

As Congress tackles the broadest proposed overhaul of financial
regulation since the 1930s, however, lawmakers still aren't fully aware of
what went wrong at the bond rating agencies, and so they may fail to
address misaligned incentives such as granting stock options to mid-level
employees, which can be an incentive to issue positive ratings rather than
honest ones.

The Securities and Exchange Commission issued a blistering report on
how profit motives had undermined the integrity of ratings at Moody's and
its main competitors, Fitch Ratings and Standard & Poor's, in July 2008,
but the full extent of Moody's internal strife never has been publicly
revealed.

Moody's, which rates McClatchy's debt and assigns it quite low value,
disputes every allegation against it. "Moody's has rigorous standards in
place to protect the integrity of ratings from commercial considerations,"
said Michael Adler, Moody's vice president for corporate communications, in
an e-mail response to McClatchy.

Insiders, however, say that wasn't true before the financial meltdown.

"The story at Moody's doesn't start in 2007; it starts in 2000," said
Mark Froeba, a Harvard-educated lawyer and senior vice president who joined
Moody's structured finance group in 1997.
"This was a systematic and aggressive strategy to replace a culture
that was very conservative, an accuracy-and-quality oriented (culture), a
getting-the-rating-right kind of culture, with a culture that was supposed
to be 'business-friendly,' but was consistently less likely to assign a
rating that was tougher than our competitors," Froeba said.

After Froeba and others raised concerns that the methodology Moody's
was using to rate investment offerings allowed the firm's profit interests
to trump honest ratings, he and nine other outspoken critics in his group
were "downsized" in December 2007.