Former Ratings Officials Testify Before FCIC

Eric Kolchinsky, Moody’s former managing director in charge of rating subprime mortgage securities, testified before the Financial Crisis Inquiry Commission. He told of how superiors pressured analysts to increase market share. He said that bankers seeking reviews for their mortgage securities took advantage of this by giving rating agencies no time to conduct proper reviews of the securities.

“That was the problem,” said Mr. Kolchinsky. “I said I needed three or four weeks to research the deal, but because bankers knew we could not walk away from a deal, they sent the documents three or four days before closing or even after closing.”

FCIC Chairman Phil Angelides, former state treasurer of California, remarked that, “The very system didn’t allow you to say no to a whole market slice.” Moody’s could have said no. They chose to rate. This is corporate responsibility, not ratings shortfalls.

Standard & Poor’s Striving to Change Bill

McGraw-Hill, which owns Standard & Poor’s, wants to change language in a Senate financial overhaul bill. It believes the current language would put credit-rating companies at a disadvantage in court.

McGraw-Hill Executive Vice President Ted Smyth issued a statement Wednesday that said the bill “creates a discriminatory pleading standard for credit rating agencies, with many unintended consequences for the market.”

Smyth was referring specifically to the portion of the bill that would enable investors to take legal action against rating firms that “knowingly or recklessly” fail to conduct a reasonable investigation of a company when developing ratings.

Instead McGraw-Hill argues that a credit rating agency could be sued for failing to predict a bankruptcy, for example, that occurred without fraud while auditors, lawyers, bankers and equity analysts would have no liability. The firm wants the provision altered to remove with this discriminatory language and instead retain the agencies’ current liability standard that requires that fraud be present.

If we are trying to create a Full Employment Act for class action securities lawyers, this will do it. Can’t we just use a simple, elegant age-old solution? Fully disclose any conflicts of interest and then its caveat emptor.