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Moody’s Whistleblower Claims Fraud and Corruption.

  • Written by Syndicated Publisher 422 Comments422 Comments Comments
    August 20, 2011

    In good times, no one wants to end a party and everyone is willing to turn a blind-eye to fraud, corruption, and excessive greed. Bear markets, however, expose the truth.

    Massive fraud at Moody’s now coming to light. Business Insider reportsMOODY’S ANALYST BREAKS SILENCE: Says Ratings Agency Rotten To Core With Conflicts, Corruption, And Greed
    A former senior analyst at Moody’s has gone public with his story of how one of the country’s most important rating agencies is corrupted to the core.

    The analyst, William J. Harrington, worked for Moody’s for 11 years, from 1999 until his resignation last year.

    From 2006 to 2010, Harrington was a Senior Vice President in the derivative products group, which was responsible for producing many of the disastrous ratings Moody’s issued during the housing bubble.

    Harrington has made his story public in the form of a 78-page “comment” to the SEC’s proposed rules about rating agency reform, which he submitted to the agency on August 8th. The comment is a scathing indictment of Moody’s processes, conflicts of interests, and management, and it will likely make Harrington a star witness at any future litigation or hearings on this topic.

    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.

    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.

    We’ve included highlights of Harrington’s story below. Here are some key points:

    • Moody’s ratings often do not reflect its analysts’ private conclusions. Instead, rating committees privately conclude that certain securities deserve certain ratings–and 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.

    More Highlights

    That was just a small sample of highlights. Here are 30 more highlights of Harrington’s accusation against Moody’s.

    The Business Insider article confirms what I said earlier today about the rating agency corruption. The difference is we now have a whistle-blowing insider telling the story.

    In this case, the SEC cannot sweep it under the rug as they did with fraud investigation of banks: SEC Destroys 9,000 Fraud Files Involving Wells Fargo, Bank of America, Citigroup, Goldman Sachs, Credit Suisse, Deutsche Bank, Morgan Stanley, Lehman

     

    For my take on the rating agency whores and more importantly what should be done to fix the problem, please see In Praise of Timely, Blatant Incompetence

    From

    Mish’s Global Economic Trend Analysis: Former Moody’s Senior Vice President Accuses Rating Agency of Fraud, Corruption, and Greed.

    Images: Flickr (licence/attribution)

    About The Author

    Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.  Visit Sitka Pacific’s Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

    You are currently viewing my global economics blog which typically has commentary every day of the week. I am also a contributing “professor” on Minyanville, a community site focused on economic and financial education.  Every Thursday I do a podcast on HoweStreet and on an ad hoc basis contribute to many other sites.

    When not writing about stocks or the economy I spend a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com.
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