Analyst William J. Harrington, a Moody’s analyst from 1999 to 2010 sent an 80 page report to the sec outline Moody’s poor and immoral practices. Essentially the Moody’s scandal is a fascinating conflict of interest between the service group and the marketing and management professionals. The management team knows that “the customer is always right”, even when they’re not. The service group is comprised of professional financial analysts who are trained to analyze the financial condition of a company and give a professional evaluation, similar to CPA’s.
The conflict arises because the client company is paying for its own evaluation. If the client doesn’t like the evaluation it will take its business elsewhere, to another rating agency. The management obviously wants to please the client and so it pressures the analysts to portray the company’s financial condition as better than it really is.
The problem is that investors and lenders to the company are relying on this information to make decisions which may involve hundreds of thousands of dollars. Therefore falsified ratings should be illegal as deceptive to the public. In addition, rating agencies” have a connotation of being objective or else they are unreliable and essentially useless. A law should be instituted that rating companies can only sell their information to third parties but cannot enter into a buyer-seller relationship with the companies that they rate.
Warren E. Buffett, a major shareholder of Moody’s, claimed that the ratings agencies could not be blamed for the financial meltdown. “I would say in this particular case [The sub-prime mortgage crisis] that they [the analysts] made a mistake that virtually everybody in the country made.” This of course begs the point because the analysts are financial professionals whose job it is to know better.
Moody’s CEO, Raymond W McDaniel said that the results were “deeply disappointing.” From the years 2000 to 2007, Moody’s revenue rose from $600 million to $2.2 billion as the housing bubble evolved. Moody’s bestowed its highest rating to 42,625 residential mortgage-backed securities during that time. The securities were later downgraded when the bubble burst.
Phil Angelides, the chairman of the Financial Crisis Inquiries Commission (FCIC) said that “This comes as close as you can to the very product being fraudulent or of no use to the marketplace in reality.”
In my opinion, a law should be passed that rating companies can only sell their information to third parties but cannot enter into a buyer-seller relationship with the companies that they rate.