In a recent editorial, the Wall Street Journal reacted to Moody’s downgrade of 15 banks, including some of the largest in the world (e.g., Bank of America, Citigroup, Goldman Sachs, J.P. Morgan Chase, Morgan Stanley, and others), as evidence of the folly of Dodd-Frank.
“Two years ago, President Obama and Congressional Democrats told Americans they had strengthened the banking system and revoked too-big-to-fail privileges from the financial giants.” The editors continue, “The law’s signature achievements are higher costs, reduced opportunities and weaker banks.”
They point out that Moody’s downgrades were rooted in banks’ inability to “generate earnings to offset the inevitable losses” because, ironically, they have “higher capital buffers and have more liquidity than they used to have.” This enhanced capital position helps taxpayers avoid the risk of a bailout, but limits banks’ ability to make money.
The Wall Street Journal argues that banks should be free to take on more risk—risk that the editors believe will generate greater earnings and overall economic growth. “The goal of financial reform should not be weak banks, but strong banks that are independent of the taxpayer.”
U.S. District Judge Paul Crotty said that Ilya Eric Kolchinsky may pursue his allegation that Moody’s violated the Sarbanes-Oxley act by cutting his pay, his responsibilities and eventually suspending him in retaliation for questioning Moody’s rating practices for risky mortgage debt.
Judge Crotty dismissed Mr. Kolchinsky’s other claims: defamation, intentional infliction of emotional distress, and that Moody’s tried to blacklist him from the industry.
Kolchinsky had been a managing director in Moody’s derivatives group. He oversaw ratings for U.S. asset-backed securities collateralized debt obligations. After Moody’s suspended him, Mr. Kolchinsky testified before the U.S. House Committee on Oversight and Government Reform during their investigation of the credit rating agencies.
Moody’s spokesman told Reuters, “We are extremely pleased that the court dismissed all but one of the plaintiff’s claims, and we are confident that we will prevail on the remaining claim once the court has looked at all of the facts.”
Mr. Kolchinsky’s lawsuit is one of many challenging the rating agencies’ methodology that assigned “triple-A” ratings to risky mortgage debt. However, it is one of the rare cases brought by an agency’s former employee.
William Harrington, a former senior president at Moody’s Investor’s Services, was sharply critical of how Moody’s and the other rating agencies conduct business. He claimed that the organization’s senior management would routinely interfere with analysts’ assessments.
Mr. Harrington, who resigned in 2010 after 11 years with Moody’s, said in a statement filed with the Security and Exchange Commission (SEC) that Moody’s had a culture of “intimidation and harassment” to ensure analysts awarded ratings that were wanted by clients. He said that the compliance department would “actively harasses analysts viewed as ‘troublesome.’”
He continued to explain that, “This salient conflict of interest permeates all levels of employment, from entry-level analyst to the chairman and chief executive officer of Moody’s corporation.”
In his 78-page filing, he also said, “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.”
Mr. Harrington’s opinion must be taken in the context of a former employee.
The New York Times reported on the private testimony Brian Clarkson gave to the Financial Crisis Inquiry Commission (FCIC) in May 2010. Mr. Clarkson was president of Moody’s Investors Service until his retirement in 2008. His FCIC testimony was recently made public.
Commissioners asked Mr. Clarkson about former Moody’s analysts who testified during congressional hearings that executives bullied them into assigning triple-A ratings. Analysts complained that those who did not cooperate were either terminated or suspended.
Mr. Clarkson said that he did remember complaints about how some of Moody’s analysts were “not playing ball with Wall Street.” However, Mr. Clarkson could not “recall specific bankers” who complained or personnel changes that resulted from the complaints. He said that he personally did not fire anyone, and could not recall any discussions about firing employees.
When Mr. Clarkson was asked if Moody’s extended discounts to banks that sought ratings, The New York Times reports that he replied, “I don’t know.” When asked about Moody’s changing the prices that it charged Wall Street in 2001, Mr. Clarkson said, “I don’t recall specific fee structures.”