Everyone v the rating agencies | FT Alphaville

Everyone v the rating agencies

No, it’s not déjà vu. The rating agencies are once again being hauled up before a jury of their not-quite peers.

This is not the first, nor even the second time the likes of Moody’s and Standard & Poor’s have been obliged to come out with their hands up, obliged to defend at great and tedious length their right to bestow gold-plated triple-A ratings upon the most toxic of sludge.

But here we are again, nonetheless.

On Wednesday, the Financial Crisis Inquiry Commission will hear testimony from 8 rating agency interessés:

Eric Kolchinsky
Former Team Managing Director, US Derivatives
Moody’s Investors Service

Jay Siegel
Former Team Managing Director
Moody’s Investors Service

Nicolas S. Weill
Group Managing Director
Moody’s Investors Service

Gary Witt
Former Team Managing Director, US Derivatives
Moody’s Investors Service

Testimony (PDF)

Warren E. Buffett
Chairman and Chief Executive Officer
Berkshire Hathaway

(Mr. Buffett has elected to provide written testimony.)

Raymond W. McDaniel
Chairman and Chief Executive Officer
Moody’s Corporation

Testimony (PDF)

Brian M. Clarkson
Former President and Chief Operating Officer
Moody’s Investors Service
Testimony (PDF)

Mark Froeba

Former Senior Vice President, US Derivatives
Moody’s Investor’s Service

While many eyes will be on Buffett (including those of CNBC’s Becky Quick and the livebloggers over at FT Money Supply) who is scheduled to testify at 11:30 ET, we think ex-employee Mark Froeba will be more interesting.

Froeba’s prepared testimony accused Moody’s of, among other things:

– giving up its “analytical distinctiveness” [page 3]

– pandering to clients “under the guise of making Moody’s more business friendly” [page 3]

– firing/transferring analysts “because they were doing their jobs, identifying risks and describing them accurately” [page 4]

– having senior managers that “put in place a new culture that would not tolerate for long any answer that hurt Moody’s bottom line [page 5].

Froeba’s testimony spans 18 pages, and includes more than a few digs at his fellow panellist, Brian Clarkson.

Clarkson, the subject of a Wall Street Journal story also cited by Froeba, said in his prepared remarks that he “[rejected] any suggestion…that Moody’s sacrificed ratings quality in an effort to grow market share.”

Eric Kolckinsky, something of a veteran of these kinds of hearings, should also make for interesting viewing.

So too should the testimony of one Gary Witt, as the WSJ’s Deal Journal blog pointed out (emphasis ours):

Witt says: “concerns that rating analysts and investment banking analysts worked too closely together prior to the issuance of securitized debt is a legitimate concern.” In particular, he describes a situation involving one of his staffers, a lawyer named Rick Michalek, who was removed from rating Goldman Sachs Group CDOs because the investment bank requested that he be taken off their deals.

“In my opinion, Rick Michalek was an exceptionally thorough legal analyst. His zealous document reviews were an added expense for investment banks who hired top law firms as transaction counsel with high hourly fees. It was my understanding that this behavior (exceptionally thorough document reviews that resulted in high legal fees being charged to investment banks) had led to a personal reprimand from Brian Clarkson, then head of structured finance.

Witt also compared Goldman and its fellow former investment banks to “saber-toothed tigers”, while Moody’s was a goat, according to the testimony.

Speaking of farm animals, here’s a suggestion for an FCIC drinking game – two shots for any references to “rating cows“; one shot for each reference to Wells notices;  one shot for each invocation of First Amendment rights; two shots for any fist-pumping references to judge Jed Rakoff’s “look ma, no underwriters!” ruling.

Related links:
Take away the credit rating agencies’ licences – Frank Partnoy / FT (2006)
Rating agencies hit by subprime probe – FT (2007)
Ratings agency scrutiny not just about CDOs anymore – FT Alphaville (2009)
E-mails detail role of rating agencies in crisis – FT (2010)