Eric Kolchinsky, a former debt analyst for Moody’s Investors Service, says the firm gave “a high rating to a complicated debt security in January 2009 knowing that it was planning to downgrade assets that backed the securities.”

The WSJ reported that the securities were put on review for a downgrade shortly thereafter.

Excerpt:

“Moody’s issued an opinion which was known to be wrong,” Mr. Kolchinsky wrote in a July letter to the rating firm’s chief compliance officer, a copy of which was reviewed by The Wall Street Journal. In the letter, Mr. Kolchinsky cited other instances in which he believes inflated ratings were given to securities . . .

Before he resigned, Mr. Kolchinsky was a managing director in a nonratings unit and wasn’t involved in ratings of the securities in question. He was previously a Moody’s ratings analyst for six years and had experience with complex securities . . .

Between 2000 and 2007, Mr. Kolchinsky worked in the ratings group, rising to oversee credit ratings of mortgage-linked securities known as collateralized debt obligations, some of the hardest-hit investments during the credit crisis. Mr. Kolchinsky said he feels “some moral responsibility for the poor CDO ratings” issued under his watch.”

Kolchinsky is scheduled to testify tomorrow on ratings-firm reform before the House Committee on Oversight and Government Reform. Should be some giggles watching Moody’s, S&P and Fitch’s lawyers during his testimony.

My solution is to remove the special NRSRO status for the 3 firms, open ratings up to competition, and eliminate the newer “payola” model — having underwriters pay for ratings instead of debt buyers.

>

Source:
Congress Takes On Credit Ratings
SERENA NG and AARON LUCCHETTI
WSJ, SEPTEMBER 23, 2009

http://online.wsj.com/article/SB125366267173132295.html

Category: Bailouts, Credit, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

12 Responses to “Ex-Moody’s Analyst: Inflated Ratings Continue”

  1. Bruce in Tn says:

    “having underwriters pay for ratings instead of debt buyers.”

    …this alone would solve the problem.

  2. manhattanguy says:

    You guys are juts discovering this? Both Moodys and S&P rating agencies are a big colossal f-up.

  3. TDL says:

    The question stands, “Will debt buyers be willing to pay?” Most of the savvier (read better run) shops that focus on debt do their own work and rely little the agencies anyway. Might this also shed some light on a much under-reported story throughout this entire fiasco, the incompetence of many institutional money managers (i.e. m.f.s & pension, both public & private, funds.)

    Regards,
    TDL

  4. Mannwich says:

    Meet the new “Extend & Pretend” economy. As long as everyone believes, then we’re OK, right?

  5. wally says:

    My proposal is: do your own due diligence. If you don’t understand something, don’t buy it. Never let somebody with no skin in the game tell you how ‘risky’ something is, because there is no single-number way to rate risk.

  6. call me ahab says:

    Wally says-

    “Never let somebody with no skin in the game tell you how ‘risky’ something is”

    or better yet- don’t let someone w/ skin in the game tell you what the risk is- their gain may be your pain

  7. leftback says:

    See no evil, hear no evil, speak no evil. S&P, Moody’s and Fitch are a bunch of monkeys.

  8. [...] Apparently the ratings agencies have not yet learned the lessons from the credit crisis.  (Big Picture) [...]

  9. contrabandista13 says:

    Barry:

    “…. My solution is to remove the special NRSRO status for the 3 firms, open ratings up to competition, and eliminate the newer “payola” model — having underwriters pay for ratings instead of debt buyers….”

    I couldn’t agree with you more…… Bear in mind, that in taking a backwards look, all the facilities that the Fed provided to the banking industry, were using the ratings of these same firms to set a criteria for the value of the securities that were provided as collateral.

    Now I want someone, other than Larry Kudlow, to explain to me how the Fed is going to implement an exit strategy…. :-)

    Best regards,

    Econolicious

  10. this Q: “Will debt buyers be willing to pay?” is moot.

    They Pay now. If the Issuer is paying, it’s from part of proceeds of the Raise–explicitly, or implicity.

    There is no excuse for the current model.

    BR, w/this: “remove the special NRSRO status for the 3 firms, open ratings up to competition, and eliminate the newer “payola” model”, proffers a simple solution, and, better, one that’d work.

  11. Moss says:

    Mr. Kolchinsky said he feels “some moral responsibility for the poor CDO ratings” issued under his watch.”

    What a novel thought.
    How ’bout offering these people who know what is really going on an incentive to be moral in lieu of the salary and bonus they get for being immoral.

  12. philipat says:

    It’s so blindingly obvious that this a cartel which operates (Or, perhaps, operated and will again operate if there is no new regulation after a period of lying low) a business model with inherent conflicts of interest. BR solution is, again, so blindingly obvious that one has to wonder how much money the lobbyists are sprinkling around DC on this one?

    The US political system seems to be terminally broken. How much longer will this “Parliament of whore” (Thanks PJ) be allowed to operate? This is not democracy but a corrupt and corrupted version of fascism.