Resisting Corporate Corruption, 3rd Edition

Case 5Ratings Integrity vs. Revenues at Moody’s Investors Services

I’m responsible for some of those CDO ratings out there. Have we learned nothing? This new methodology is not just flawed, it’s irresponsible.

ERIC KOLCHINSKY, FORMER MANAGING DIRECTOR of ratings for U.S. Asset-Backed Collateralized Debt Obligations (ABS CDOs), put down the phone and began to ponder his next move. It was summer, 2008. Kolchinsky now occupied a desk within Moody’s Analytics. This part of Moody’s Corporation did not issue ratings of debt or preferred stocks. That function continued to reside within a separate organization that operated as a Nationally Recognized Statistical Rating Organization (NRSRO). Kolchinsky had worked within Moody’s NRSRO until October 2007. There he had issued ratings of subprime mortgage-backed CDOs, granting many of them coveted AAA ratings.

Over the course of 2006–07, Kolchinsky had become increasingly uncomfortable with the mortgage securities market and with the complexity of the securities coming to him for review. As a result, in August, Kolchinsky decided to protest; he told Moody’s management that continuing to rate subprime CDOs would be a possible securities law violation. In October he was transferred out of ratings.

The phone call just completed had brought unsettling news. When Kolchinsky protested the year before, he thought his protest had been heeded. Moody’s had followed Kolchinsky’s advice, downgrading various subprime CDOs and ceasing to rate new ones. ...