Monday, April 12, 2010

Where Was Moody's Board When Top-Rated Bonds Blew Up?

McClatchy reports Where was Moody's board when top-rated bonds blew up?

"As the bottom fell out of the housing market and complex mortgage-backed securities began tanking in 2007, a strange thing happened at Moody's Investors Service, one of the largest firms that rate bonds for the risks they pose to investors. Moody's blue-ribbon board of directors stopped receiving key information from an internal committee that was supposed to keep the board informed of risks to the company, a McClatchy investigation has found. Instead, the ad hoc risk-management committee suddenly disappeared, precisely at the time when the board and management should have been shifting to higher alert as the financial world began quaking."

""My question the whole time has been, 'Where the hell has the board been?'" said a former Moody's employee who was on the disbanded committee. The employee spoke on the condition of anonymity at the advice of a lawyer, fearing future litigation. "I would have expected, sitting where I was, that I would have got a lot more calls from the board. I got none of that.""

""There was no (corporate) governance at the firm whatsoever. I met the board, I presented to them, and it was just baffling that these guys were there. They were just so out of touch," another former high-level Moody's executive said."

I'm not sure how it's supposed to work. But I know some investments (like by pension funds or government organizations) are limited to very high rated investments. But what happens when the ratings are flawed? Ok, sometimes it happens, but are the ratings agencies just companies publishing their opinions (like movie critics?) or is there some responsibility and liability? Shouln't there be?


Anonymous said...

Yes, you are correct. The ratings agencies defense in the event of lawsuits or criminal prosecution is the first amendment.

Moody's and Fitch would claim that they are in fact just like movie critics, and they were just making free speech. Of course this "free speech" was bought and paid for by the Wall Street banks peddling their (knowingly) worthless MBS crap to unsuspecting buyers. So like any good confidence game or scam, they needed a confederate, and they found the perfect ones in the ratings agencies.

This is one of the areas where the "the systemic fraud of Wall Street" is most vulnerable to RICO prosecution, because of the conspiratorial nature of the implied agreement between the ratings agencies and those paying for the deceptive and fraudulent ratings services.

It really is like the old joke about hiring an accountant.

The first candidate walks into the office of the company president and the president asks him - "what's two plus two?"

The candidate says "four".

The president says "Thank you, you can go now."

The next candidate comes in the room and again the president asks "what is two plus two?" The candidate answers "four".

The president says "thank you, you can leave now".

The last candidate walks the office and the president again asks "what's two plus two?".

The candidate pauses for a moment and then closes the door, walks over to the windows and shuts the blinds, then leans over to the president's ear and whispers....

"Whatever you would like it to equal"

The president then exclaims....


That joke actually pretty well sums of the root cause of the financial meltdown. A dysfunctional compensation system, combined with uber-greedy sociopathic people in control, in search of maximum returns in the shortest possible timeframe, made possible by zero regulatory oversight and a complicit federal reserve bank.


So it goes


Anonymous said...

Please read the attached story for a basic description of how the initial retail level mortgage fraud was created at one major bank - Washington Mutual, with full knowledge and approval of management.

These guys were practicing fraudulent banking..... coming and going.

Still waiting for the perp walks.