Harrington's Moody
The eternally lost villain in the background of the financial crisis movie have been the rating agencies. While Wall Street is vilified and the government continues its eternal ineptitude in comprehending and dealing with financial markets, rating agencies have gotten a free pass.
For eleven years William J. Harrington worked at Moody's and from 2006 to 2010 was the Senior Vice President in its derivatives products group, which was directly responsible for many of the incomprehensible ratings given out by Moody's leading up to the real estate bubble pop.
Now Harrington is striking back at his former employers and the system at large. Though his admission is news to precisely no one in the know it still bares acknowledgment, especially for many of you guys who will be dealing with rating agencies for the very first time.
Harrington outlines the details of how Moody's did and presumably still does business with the financial establishment. From senior management lies to product managers voting on ratings issued to compliance being a glad handing tactic instead of a risk management tool, it is all there and more.
The primary conflict of interest at Moody's is well known: The company is paid by the same "issuers" (banks and companies) whose securities it is supposed to objectively rate. This conflict pervades every aspect of Moody's operations. It incentivizes everyone at the company, including analysts, to give Moody's clients the ratings they want, lest the clients fire Moody's and take their business to other ratings agencies.
I only wonder why news like this is treated dismissively, yet we all go ape shit when another ratings agency downgrades U.S. debt? Are we to believe that S&P was above all of this fray? Or is was the U.S. downgrade a signal of ratings agencies getting their act together?
Whatever the case I certainly hope Harrington doesn't wind up like our old pal Bradley Birkenfeld, who is ironically in jail while sporting a page on the National Whistleblowers Center web site. Keep in mind guys, the game is changing from the regulatory standpoint.
No matter how slowly they may move, the wheels are in motion. Be wary of free lunch rating agency baptisms and shady dealings. No matter how tempting the tale, they are certainly not your friends and can cost you a lot more than a quick buck can reward you.
I don't think the ratings agencies have necessarily gotten a free pass. I think they've just always been viewed as incompetent opportunists, making the outrage against them seem muted.
Since there is this conflict of interest though, how should rating agencies get business? Through a lottery system?
If everyone viewed them as incompetent opportunists their ratings wouldn't have as much sway as they do. They sit in that no man's land between regulators, exchanges, market actors/makers, etc yet their word is often treated like the combination of legal authority and impartial expertise, neither of which it is remotely close to being.
I don't think it's so much a matter of them getting business, since they are a pretty efficient oligopoly. I just think that if the government is looking for someone to regulate, they are a far better candidate than actual market participants. As for business/comp...why can't their work be valued on its merits? A sell for an objectively shitty firm should be rewarded, a buy for an objectively shitty firm should be penalized. Now, as to how to make that happen...your guess is as good as mine.
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