Reporting the Obvious

Kevin G. Hall at McClatchy writes a piece on Moody's and its not at all insignificant role in the financial crisis. Anecdotal specifics aside, there isn't much in the report that anyone would find too surprising, but it's still nice to see the issue finally get this kind of attention.

A McClatchy investigation has found that Moody's punished executives who questioned why the company was risking its reputation by putting its profits ahead of providing trustworthy ratings for investment offerings.

Instead, Moody's promoted executives who headed its "structured finance" division, which assisted Wall Street in packaging loans into securities for sale to investors. It also stacked its compliance department with the people who awarded the highest ratings to pools of mortgages that soon were downgraded to junk. Such products have another name now: "toxic assets."

Every once in a while the BBC website will have in the bottom right corner a section, untitled as far as I know, that seems to function as a home for the miscellaneous and vaguely interesting or humorous chit-chat fodder; the section hovers within the Venn-Diagram of News You Can Use and Quirky Factoid Exhibition and 'Ow 'Bout We 'Ave A Lark at the Ol' Colonials? Incidentally, this is also the section where you will find summaries of certain socially scientific studies that, more often than not, seem to justify themselves on their ability to point out--but with science!--insights that should be readily apparent to anyone who is neither catatonic nor a sociopath. For instance, you might find something like "Primates Found to Become Emotionally Agitated When Repeatedly Shocked With Cattle Prods," or, "Abused Women Shown to Have a Higher Proclivity Towards Depression Then Those Not Abused," or, and this is a real one, "Kids Coming From Crippling Poverty Less Likely to Go to School."

In sheer obviousity, "Profitability, Not Ethics, Plays Biggest Role in Decision Making Process at Financial Company," seems equally groundbreaking to me. But again, I suppose it's nice to have it all on paper.

"The story at Moody's doesn't start in 2007; it starts in 2000," said Mark Froeba, a Harvard-educated lawyer and senior vice president who joined Moody's structured finance group in 1997.

"This was a systematic and aggressive strategy to replace a culture that was very conservative, an accuracy-and-quality oriented (culture), a getting-the-rating-right kind of culture, with a culture that was supposed to be 'business-friendly,' but was consistently less likely to assign a rating that was tougher than our competitors," Froeba said.

After Froeba and others raised concerns that the methodology Moody's was using to rate investment offerings allowed the firm's profit interests to trump honest ratings, he and nine other outspoken critics in his group were "downsized" in December 2007.

[...]

Experts such as Columbia University's Coffee think that Congress must impose some legal liability on credit rating agencies. Otherwise, they'll remain "just one more conflicted gatekeeper," and the process of pooling loans — essential to the flow of credit — will remain paralyzed and economic recovery restrained.

"If (credit) remains paralyzed, small banks cannot finance the housing demand. They have to take them (investment banks) these mortgages and move them to a global audience," said Coffee. "That can't happen unless the world trusts the gatekeeper."