Change brings corruption

Opinion: June 12, 2010 at 12:00a.m.

By Bruce Ramsey

Seattle Times

For the panic of 2008, a special place in hell is reserved for the bond-rating agencies. Though they did not create the bad mortgages and the bad bonds, they affixed on bad bonds the coveted rating of Triple A, reserved for the safest securities in the world.

What were they thinking?

The Financial Crisis Inquiry Commission, an arm of Congress, held a hearing about it last week in New York. News reports focused on the testimony of Warren Buffett, chairman of Berkshire Hathaway, the big shareholder in Moody’s Investors Service. But the people with a story were Moody’s ex-employees.

Eric Kolchinsky, for example. He told how the company changed from 2000 to 2007, when he rose from being an analyst to managing director of a group that rated bonds.

He recalled being shown a telecom bond early in his time at Moody’s. After studying it, he rejected it. That the investment bankers were willing to pay for a rating didn’t matter. Moody’s had to throw it out. And it did. “I felt no pressure to reverse my decision,” Kolchinsky said.

That is the way it is supposed to work.

Moody’s had long been a subsidiary of Dun & Bradstreet. In 2000, Moody’s went public with a sale of stock. According to Kolchinsky’s prepared testimony, this changed its culture from that of “a university academic department to one which values revenue at all costs.”

Re-education

Mark Froeba, who left Moody’s in 2007 as a senior vice president, told a similar story. He said the company “re-educated” its analysts in the new culture. They became “a docile population ... afraid to upset investment bankers.” These bankers, he said, came “to believe that Moody’s management would, where necessary, support the bankers against its own analysts.”

The change at the rating agencies — and it wasn’t only at Moody’s — are what “allowed the creation of hundreds of billions of toxic instruments which lay at the core of the financial crisis,” Kolchinsky said.

What to do? There are several ideas. One is to have buyers pay for bond ratings — but how to get them to pay it? Another is regulation, though that puts the government’s hand on agencies that evaluate governments. Sens. George Lemieux, R-Fla., and Maria Cantwell, D-Wash., have a measure to take the references to ratings out of federal law, so that the ratings no longer have an official flavor.

Bruce Ramsey is a columnist for the Seattle Times. Distributed by McClatchy-Tribune Information Services.