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Ex-Moody’s Analyst: Inflated Ratings Continue

Posted By Barry Ritholtz On September 23, 2009 @ 10:00 am In Bailouts,Credit,Regulation | Comments Disabled

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 [1] 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.

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Source:
Congress Takes On Credit Ratings [1]
SERENA NG and AARON LUCCHETTI
WSJ, SEPTEMBER 23, 2009

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


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[1] WSJ: http://online.wsj.com/article/SB125366267173132295.html

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