wildcard
26th April 2010, 01:51 AM
http://www.washingtonpost.com/wp-dyn/content/article/2010/04/23/AR2010042304661.html
Former credit-rating firm executives say they were told to cut corners
By Dina ElBoghdady
Saturday, April 24, 2010
Former officials at the nation's major credit-rating companies told a Senate panel Friday that a pressure-cooker culture fostered by top executives encouraged them to cut corners so their firms could handle an exploding volume of deals and keep raking in profits during the bubble years.
The testimony backs the findings of a probe by the Senate permanent subcommittee on investigations. The probe concluded that these firms used outdated models, gave high ratings to flimsy investment vehicles and waited too long to downgrade those investments in part because they were unduly influenced by their Wall Street clients and their own quest to make more money.
Investors relied on the ratings companies to impartially gauge the risk of complex deals tied to home mortgages. But the firms failed to do that, and the ensuing downgrade of hundreds of mortgage-backed securities in mid-2007 "shocked financial markets," and "the financial crisis was on," said Sen. Carl M. Levin (D-Mich.), head of the Senate panel.
Financial regulatory overhaul legislation before Congress aims to increase oversight of the ratings industry to prevent such a collapse in the future.
Frank Raiter, a former managing director at Standard & Poor's, told lawmakers about a disconnect between senior managers who were trying to boost profits and analytical managers who were striving to improve risk assessment. Raiter said many of his colleagues left after trying to "fight the good fight."
Many were frustrated after their pleas for tighter controls fell on deaf ears. Their bosses only said: "But revenues will go down," said Raiter, who retired in 2005.
In defense of the ratings companies, current executives said their firms took actions they thought were appropriate at the time. Raymond W. McDaniel Jr., chief executive of Moody's Corp., parent of the credit-rating firm, said his company is "not satisfied with the performance of our ratings" during the boom years, but "neither we -- nor most other market participants, observers, or regulators -- fully anticipated the severity or speed of deterioration" in the housing and credit markets.
Yuri Yoshizawa, senior managing director at Moody's Investors Service, said she does not remember retaliation against analysts who were critical of deals.
"I do not remember an instance where I took somebody off because the bank complained about their performance or because they were upset about some of the things that they may have said," Yoshizawa said.
But one former official at her firm, Richard Michalek, told of a different climate. Michalek described a "quantity-over-quality" mentality that rewarded analysts who accommodated clients and pushed out others who meticulously documented deals and asked probing questions.
Michalek described the "management by fear" style of the executive who once ran Moody's structured finance division. That executive arranged one-on-one meetings with each lawyer in the group to convey whether their Wall Street firm clients were satisfied with them, Michalek said. He said he was told that he was one of the "difficult analysts" because he made too many comments on deal documentation.
"The primary message was plain: Further complaints from the customers would very likely abruptly end my career at Moody's," Michalek said.
Most of the former officials who testified said their firms were chasing after market share and short-term profits. Eric Kolchinsky said he thinks he lost his position as a managing director at Moody's because he raised concerns about some complex investments known as collateralized debt obligations.
He was expected to rate these CDOs, and the ratings would be based on the quality of related subprime bonds that he knew were going to be severely downgraded, Kolchinsky said. He said he successfully pressed his superiors to have the downgrades reflected in the CDO ratings.
A month later, he was notified that that his group's market share had dropped. Kolchinsky said he was asked to leave the group less than a month after that e-mail and less than two months after the run-in with managers.
Former credit-rating firm executives say they were told to cut corners
By Dina ElBoghdady
Saturday, April 24, 2010
Former officials at the nation's major credit-rating companies told a Senate panel Friday that a pressure-cooker culture fostered by top executives encouraged them to cut corners so their firms could handle an exploding volume of deals and keep raking in profits during the bubble years.
The testimony backs the findings of a probe by the Senate permanent subcommittee on investigations. The probe concluded that these firms used outdated models, gave high ratings to flimsy investment vehicles and waited too long to downgrade those investments in part because they were unduly influenced by their Wall Street clients and their own quest to make more money.
Investors relied on the ratings companies to impartially gauge the risk of complex deals tied to home mortgages. But the firms failed to do that, and the ensuing downgrade of hundreds of mortgage-backed securities in mid-2007 "shocked financial markets," and "the financial crisis was on," said Sen. Carl M. Levin (D-Mich.), head of the Senate panel.
Financial regulatory overhaul legislation before Congress aims to increase oversight of the ratings industry to prevent such a collapse in the future.
Frank Raiter, a former managing director at Standard & Poor's, told lawmakers about a disconnect between senior managers who were trying to boost profits and analytical managers who were striving to improve risk assessment. Raiter said many of his colleagues left after trying to "fight the good fight."
Many were frustrated after their pleas for tighter controls fell on deaf ears. Their bosses only said: "But revenues will go down," said Raiter, who retired in 2005.
In defense of the ratings companies, current executives said their firms took actions they thought were appropriate at the time. Raymond W. McDaniel Jr., chief executive of Moody's Corp., parent of the credit-rating firm, said his company is "not satisfied with the performance of our ratings" during the boom years, but "neither we -- nor most other market participants, observers, or regulators -- fully anticipated the severity or speed of deterioration" in the housing and credit markets.
Yuri Yoshizawa, senior managing director at Moody's Investors Service, said she does not remember retaliation against analysts who were critical of deals.
"I do not remember an instance where I took somebody off because the bank complained about their performance or because they were upset about some of the things that they may have said," Yoshizawa said.
But one former official at her firm, Richard Michalek, told of a different climate. Michalek described a "quantity-over-quality" mentality that rewarded analysts who accommodated clients and pushed out others who meticulously documented deals and asked probing questions.
Michalek described the "management by fear" style of the executive who once ran Moody's structured finance division. That executive arranged one-on-one meetings with each lawyer in the group to convey whether their Wall Street firm clients were satisfied with them, Michalek said. He said he was told that he was one of the "difficult analysts" because he made too many comments on deal documentation.
"The primary message was plain: Further complaints from the customers would very likely abruptly end my career at Moody's," Michalek said.
Most of the former officials who testified said their firms were chasing after market share and short-term profits. Eric Kolchinsky said he thinks he lost his position as a managing director at Moody's because he raised concerns about some complex investments known as collateralized debt obligations.
He was expected to rate these CDOs, and the ratings would be based on the quality of related subprime bonds that he knew were going to be severely downgraded, Kolchinsky said. He said he successfully pressed his superiors to have the downgrades reflected in the CDO ratings.
A month later, he was notified that that his group's market share had dropped. Kolchinsky said he was asked to leave the group less than a month after that e-mail and less than two months after the run-in with managers.