Wednesday, September 23, 2009

Moody's exec says revenue favored over ratings

Incentives are a powerful force.

WASHINGTON, Sept 23 (Reuters) - Senior managers at Moody's Corp (MCO.N) still favor revenue over ratings quality and are willing to dismiss or silence employees who disagree with them, according to a recently suspended Moody's managing director.

In written testimony obtained by Reuters for a U.S. congressional hearing on Thursday, Eric Kolchinsky said the firm's credit policy group is weak and short staffed, and its analysts are "bullied" by managers who override their decisions to generate revenue.

Kolchinsky said he was suspended by Moody's because of a warning he sent the New York-based company's compliance group about what he believed to be a securities violation.

In a statement, Moody's said it "takes seriously all allegations of potential impropriety" and has a strict non-retaliation policy for employees who raise complaints.

Congress and regulators are cracking down on the ratings industry, blamed for exacerbating the financial crisis by assigning top ratings to mortgage-linked securities that later crumbled as home prices fell.

Kolchinsky said Moody's methodologies for rating complex products are inadequate and do not realistically reflect the risk of the underlying securities.

Moody's shares slid 8.4 percent on Wednesday, closing down $1.87 at $20.49. In contrast, shares of McGraw-Hill Cos (MHP.N), which owns Moody's main rival Standard & Poor's, fell just 1.7 percent.

Warren Buffett's Berkshire Hathaway Inc (BRKa.N) (BRKb.N) is Moody's largest shareholder, but has been reducing its stake over the last couple of months.


Kolchinsky first raised concerns about the methodology for rating complex structured debt in 2007, according to a source familiar with the events and a memo Kolchinsky sent to Moody's chief compliance officer.

Moody's changed its methodology for rating collateralized loan obligations late in 2008, but nevertheless continued to affirm investment-grade ratings it knew would later be downgraded deep into "junk" status under the new methodology, said the source familiar with the memo.