People write letters . . .
In an 80-page letter to federal regulators, a former Moody’s senior vice president says the firm systematically squelched its analysts’ private doubts to keep deals and profits flowing. Moody’s managers intimidated analysts who stood in the way of favorable ratings, and its compliance department harassed employees who took an independent stand, according to the former analyst, William J. Harrington.
Not a former janitor. Not a one-time low-level clerk. A former senior vice president.
I’m guessing that those 80 pages include a sizeable chunk of supporting evidence that’s going to leave a big mark on Moody’s. [UPDATE: Harrington's letter is here (pdf)] But hey, no one could have anticipated . . .
Well, no one but anyone who’s taken basic economics.
Given that the ratings agency gets paid by the very people whose bonds they are rating, they’ve got a strong incentive to make the customer happy. Those analysts who didn’t, says Harrington, were pressured into . . . how to put it? . . . revising their original opinions so that they were less harsh and more friendly to the folks who write the checks.
Michael Hudson, who teaches economics at the University of Missouri – Kansas City (the same school where Bill Black teaches), has some choice things to say about the rating agencies as well:
Moody’s, Standard and Poor’s and Fitch focus mainly on stocks and on corporate, state and local bond issues. They make money twice off the same transaction when cities and states balance their budgets by spinning off public enterprises into new corporate entities issuing new bonds and stocks. This business incentive gives the ratings agencies an antipathy to governments that finance themselves on a pay-as-you-go basis (as Adam Smith endorsed) by raising taxes on real estate and other property, income or sales taxes instead of borrowing to cover their spending. The effect of this inherent bias is not to give an opinion about what is economically best for a locality, but rather what makes the most profit for themselves.
Masquerading as objective think tanks and research organizations, the ratings agencies act as lobbyists for banks and underwriters by endorsing a race to the bottom – into debt, privatization sell-offs and an erosion of consumer rights and control over fraud.
Hiding their own incentives behind a mask of objectivity. That pretty much says it. Until someone pulls off the mask, that is.
Today’s Book Salon about Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon could be really something.