Moody's journey from fear of inaccurate ratings to fear of upsetting debt sellers

A former Moody’s Senior Vice President explains how $$$ destroyed Moody’s analytical culture:

Moody’s role in the financial crisis… begins sometime in the year 2000. This was the year that Dun & Bradstreet Corporation and Moody’s Corporation became separate independent publicly-traded companies, and, I might add, that Moody’s senior managers were first able to begin receiving compensation in the form of stock options and other stock compensation, interests directly in Moody’s Corporation…

When I joined Moody’s in late 1997, an analyst’s worst fear was that he would contribute to the assignment of a rating that was wrong, damage Moody’s reputation for getting the answer right and lose his job as a result.

When I left Moody’s, an analyst’s worst fear was that he would do something that would allow him to be singled out for jeopardizing Moody’s market share, for impairing Moody’s revenue or for damaging Moody’s relationships with its clients and lose his job as a result.

In both cases, there was certainly the fear of job loss. But in the former case it was theoretical and rare – you did not really know of anyone who had been fired for getting the answer wrong but it provoked a healthy anxiety that you had better be careful not to miss anything. Moody’s decades-old reputation for accuracy and integrity was in your hands. In the latter case, the fear was real, not rare and not at all healthy. You began to hear of analysts, even whole groups of analysts, at Moody’s who had lost their jobs because they were doing their jobs, identifying risks and describing them accurately.

The best example of this was described in a Wall Street Journal article about Moody’s Managing Director (MD), Brian Clarkson, published in April of 2008. As that article reports, Brian Clarkson quadrupled Moody’s market share in the residential mortgage back securities (RMBS) group by simply firing (or transferring) nearly all the analysts in the group and replacing them with analysts willing to apply a new rating methodology. This process, or at least the threat of this process, became the model for Moody’s new culture. As I am quoted saying about this new model in the Wall Street Journal article, ‘There was never an explicit directive to subordinate rating quality to market share. There was, rather, a palpable erosion of institutional support for any rating analysis that threatened market share’.

Thus, Moody’s senior managers… put in place a new culture that would not tolerate for long any answer that hurt Moody’s bottom line. Such an answer became, almost by definition, the wrong answer, whatever its analytical merit.

Posted by James on Sunday, June 13, 2010