WASHINGTON, Aug. 23 (UPI) — U.S. credit-ratings agencies have conflicts of interest because they’re paid by firms they’re supposed to rate neutrally, an ex-Moody’s Corp. executive said.
“This conflict of interest permeates all levels of employment, from entry-level analyst to the chairman and chief executive officer of Moody’s Corp.,” William Harrington, a former Moody’s Investors Service derivative products senior vice president, said in a filing to the U.S. Securities and Exchange Commission, which is considering new rules to reform the agencies.
Agency analysts are pressured through a culture of “intimidation and harassment” to give clients the ratings they want out of fear the clients will otherwise fire the agency and take their business to another one, Harrington said in a 78-page “comment” submitted to the SEC Aug. 8.
Moody’s is one of the three central credit-rating companies in the United States, along with Standard & Poor’s Financial Services and Fitch Ratings. Their job is to provide an objective analysis of the risk posed to investors by bonds, companies and countries.
But Harrington said Moody analysts whose conclusions differed from what Moody clients wanted were “viewed as ‘troublesome,’ i.e. independent,” and often harassed, disciplined, transferred or fired.
“The goal of management is to mold analysts into pliable corporate citizens who cast their committee votes in line with the unchanging corporate credo of maximizing earnings of the largely captive franchise,” Harrington said in his comment.
The ratings agencies were sharply criticized this month after S&P took the unprecedented step Aug. 5 of stripping the U.S. government of its top-grade, risk-free AAA rating.
The agencies were also placed at the heart of the 2007 U.S. subprime-mortgage crisis, which led to the worst financial crisis since the Great Depression of the 1930s.
When the U.S. housing bubble burst in 2006 and 2007, hundreds of billions of dollars of mortgage-backed securities proved to be worthless — after having received high ratings from the agencies.
A congressional panel called the agencies “essential cogs in the wheel of financial destruction.” The U.S. Justice Department opened an inquiry into S&P’s subprime-mortgage securities ratings.
S&P said late Monday its president, Deven Sharma, 55, would step down Sept. 12 and leave the company by the end of the year. He will be replaced by Douglas Peterson, a top Citigroup Inc. executive.
The management change was unrelated to the Justice Department inquiry or other pressures, The New York Times reported, citing a person briefed on the matter.
Harrington, who worked for Moody’s from 1999 until last year, when he resigned, told the SEC its proposed changes to ratings-agency regulation would do little to improve the situation and could in fact make it easier for agencies to pressure their staffs.
Moody’s spokesman Michael Adler told United Press International in a statement Tuesday the company clearly separates the commercial from the analytical.
“We cannot emphasize strongly enough the importance Moody’s places on the quality of our ratings and the integrity of our ratings process,” he said. “For that very reason, we have robust protections in place to separate the commercial and analytical aspects of our business.”
He did not immediately respond to a UPI call for further comment.