WASHINGTON — Executives from credit-rating agencies Moody's Investors Service and Standard & Poor's presented additional evidence Friday that management pressure to maintain their market share eroded the quality of investment-grade ratings and amplified the nation's financial crisis.
Testifying under oath before the Senate Permanent Subcommittee on Investigations, officials who were closely involved in giving investment-grade ratings to complex financial instruments backed by shaky U.S. mortgages described how they were pressured to give Wall Street what it wanted.
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Called to appear before the panel, Richard Michalek, a former Moody's vice president and senior credit officer, described the ratings process for deals that could bring more than $1 million in fees as a "must say yes" atmosphere.
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Kolchinsky recounted how in the first two quarters of 2007, his group generated more than $200 million in revenue for Moody's by giving complex deals investment-grade ratings _ which told investors that they were safe bets. In the late summer of 2007, however, Kolchinsky was informed by superiors that bonds issued a year earlier were about to be severely downgraded.
That should have required a new methodology for ratings on deals that were still pending, but when he tried to do that, he was told not to. It amounted to securities fraud, in his opinion.
"My manager declined to do anything about the potential fraud, so I raised the issue to a more senior manager," he testified. He said that the complaint resulted in a change to methodology. "I believe this action saved Moody's from committing securities fraud. Because of the culture, I knew what I did would possibly jeopardize my role at Moody's."
He was right. A month later, he was sent a nasty e-mail asking why his market share slipped from 98 percent to 94 percent in the third quarter. The e-mail came, he said, just days after Moody's had downgraded more than $33 billion in bonds backed by subprime mortgage loans. Less than two months after challenging the integrity of the ratings, Kolchinsky was removed from his post and given a lower-paying job elsewhere in the company with far less responsibility. Later, he was pushed out altogether.
http://www.mcclatchydc.com/2010/04/23/92775/executives-bond-rating-agencies.html
