Monday, August 29, 2011

A look inside the ratings agencies

A peak inside the ratings agencies with this excerpt from a 78-Page comment a former Moody's employee filed with the SEC
The contributor was left to his own devices to produce quality work and strategized relentlessly on how to do so. Each workday consisted of non-stop ducking and weaving so as to hold firm against the unrelenting pressure from bankers, issuers and management. In one annual review, the contributor mentioned that doing the good job for which he was recognized was taking a toll. Managers replied that they were sorry, that should not be the case, but they did not readjust their priorities.

Moody's incentivized an analyst to accede to all items demanded by an external paymaster and to work to the paymaster's schedule. Self-respect was the prime barrier that kept the contributor and other Derivatives analysts from being agents in the degradation of their own work.  

Raising an issue to one's manager inevitably resulted in a series of phone conversations with a banker, her bosses, issuer and outside counsel on one side and the contributor and fellow analyst on the other side. The manager presided, trying to broker an agreement. Sometimes, the manager treated the views of each side as equally valid. More often, the contributor and colleague began on the defensive and stayed there throughout the call. The analysts argued their corner as effectively as possible while their manager remained silent egging on the rating team to fold.

Putting up a spirited effort before caving-in made analysts look good in the eyes of management. Opposing a banker or issuer brought only trouble from Moody's senior management. It also inevitably ensured that the parties would re-convene on the following day for a heated reprise. The banker and Derivatives manager would each be joined by still more of her managers, leaving the two members of the rating team even less leverage to maintain their position.

Holding the line on these calls required preparation and a determined state of mind. Bankers and issuers were willing to have as many calls a day as were necessary to wear a rating team down. A manager often opened the door for the analysts to let go of an issue that the same manager had presented in a group meeting as vital to implement with no compromise.

Not once in eleven years did a manager ask if the contributor was analyzing an issue with sufficient rigor. Nor did management in a single instance suggest that a harder stance should be adopted towards a banker or issuer.Prior to 2010 the contributor received very high ratings for his ability to work on difficult transactions and for his analytical capabilities. He would not have remained at Moody's otherwise. Yet, formal feedback in annual reviews centered on the recurring themes that the contributor should make life easier for bankers and issuers and that he should be more alert to the bottom line. Management cautioned the contributor that he had been lucky in that concerns he had raised emphatically had in fact materialized. One day he would be wrong and then he would be wrong on his own. The contributor was told to offer solutions to bankers and issuers in areas where he was well-versed, rather than continue his practice of simply identifying shortcomings. Management would like the contributor to become the public face of one of the new structured finance methodologies so as to market the capabilities of Moody's. Each year, the contributor was compelled to defend time spent on monitoring DPCs at the expense of rating new CDOs and monitoring existing ones.

Informal assessment followed along the same lines. A recently-promoted managing director let the contributor know that a senior manager had accused the contributor of killing deals. A banker had come to Moody's to preview a CDO with the ability to invest in the local currencies of 100+ countries. The contributor, who had been a currency trader and a currency analyst prior to joining Moody's, pointed out that, for a start, many of the currencies were not tradable. They were units of measurement used in compiling national accounts.

Pointing out shortcomings in a preview meeting was critical to preserving the integrity of a CDO opinion down the line. CDO bankers routinely cited that they had obtained management buy-in in preview meetings when refusing to consider comments made by a rating team. Maybe, the banker would open discussions on the topic in a subsequent CDO, but not at the late stage of the current one. Taking pre-emptive action so that an analyst would not start from this losing position was in the view of one senior manager "killing deals."

Feedback from senior managers to the contributor consistently took the form of intimidation. Brian Clarkson employed this approach, stationing himself in a well-traveled hallway with a checklist of complaint ready for whichever analyst happened by. In one instance, Mr. Clarkson expressed regret that the contributor had completed methodologies that were comprehensive and fully documented. In fact, the contributor had done exactly that to keep senior management from diluting a methodology for the sake of more business.