A former senior analyst with Moody's has filed an unusual 78 page comment letter with the SEC, detailing his complaints with Moody's rating methods, conflicts of interest, and management. The letter is filed in the form of a comment letter in response to the SEC's rule proposal, which was mandated by the Dodd-Frank Act, which would apply new rules to Nationally Recognized Statistical Rating Organizations, or NRSROs. The letter decries the proposed regulations, suggesting that they would be ineffective at what he sees as the problems with credit ratings in general, and Moody's ratings in particular.
The author of the comment letter, William J. Harrington, had been employed by Moody's for eleven years until his resignation for, his letter says, "personal reasons" in 2010. Much of the caustic comment letter is repetitive, but it has a consistent theme. Harrington alleges that Moody's has a pervasive conflict of interest arising from the fact that Moody's publishes opinions and is paid to do so. Harrington goes into great depth in describing how this conflict of interest plays out in the formation of ratings. According to the letter, ratings are finalized by a committee, which is convened with the participation of analysts, in accordance with procedures established by the ratings agency. Yet Harrington believes that management is able to effectively override the analysts' opinions, and does so with the goal of enhancing Moody's own business prospects. Harrington's letter details specific instances where he believes this occurred, in many situations where he appears to have been the analyst whose opinion was not favorably regarded. His missive is specific as to names of individuals involved, and the particulars of many rated transactions.
Harrington's letter is strongly worded. For example, here is his acerbic explanation of the compliance function at Moody's:
"Collectively, the Compliance policies serve the sole purpose of constructing a virtual Potemkin village for regulators to admire."
Harrington is equally unsparing as to his perception of Moody's role in the financial crisis:
"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. Implementation of the credo is impressively flexible - in laying the groundwork for the financial crisis, management rewarded lenient voting with respect to all asset classes. In the immediate aftermath of the crisis, management advocated voting in a uniformly harsh manner with respect to all asset classes and as time has passed, management has encouraged each type of voting, based on its varying strategies for individual asset classes."
Whether or not the reader believes Harrington's allegations, this comment letter is likely to be given close scrutiny by advocates for credit rating reform.
The full text of the comment letter can be found on the SEC's website here: http://www.sec.gov/comments/s7-18-11/s71811-33.pdf