Moody's Is Latest Wall Street Criminal To Pay Fine And Avoid Prosecution

The first rule of the kleptocracy we currently live in is clearly “heads I win, tails you lose”.  In another classic Friday announcement before a long holiday weekend, Moody’s announced that it has settled suits brought by federal and state governments over mortgage ratings leading up to the financial crisis. Moody’s agreed to pay $864 million dollars in penalties with the fine pretty much split 50/50 between the federal government and the 21 states plus Washington, D.C. who were parties to the suit. This follows Standard & Poors’ settlement of a similar suit in 2015 for a little over $1.35 million.

My Connecticut Attorney General, George Jepsen, led the negotiations to end the lawsuit originally filed in 2010 and said Moody’s bogus ratings on mortgage backed securities (MBS) were “directly influenced by the demands of the powerful investment banking clients who issued the securities and paid Moody’s to rate them”. The US Attorney General’s office added, “Moody’s failed to adhere to its own credit-rating standards and fell short on its pledge of transparency in the run-up to the Great Recession.” Moody’s was happy to collect outrageous fees in order to rate MBS that were clearly inferior as highly as the issuer wanted. Some of those MBS were privately labeled as “craptacular” and “had the distinct aroma of default” by the issuers themselves but still received the coveted AAA rating from Moody’s and S&P. The issuers were only to happy to bribe the rating agencies with enormous fees and the agencies were only too happy to accept the bribe. As usual, no individual from Moody’s or S&P has been charged with a crime.

Moody’s actively purged those employees and/or executives who questioned the ratings being given and felt that the company was putting profits before trustworthy ratings the agency was supposedly committed to providing. According to an executive who worked at the firm for a decade before being let go, “The story at Moody’s doesn’t start in 2007; it starts in 2000. 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.” It’s important to note, according to this executive, the year things started going south at Moody’s – 2000. Coincidentally, that was the year Moody’s was spun off from Dun & Bradstreet and went public. Executives received stock options that could be worth millions based on the stock’s performance. One former executive stated, “It didn’t force you into a corrupt decision, but none of us thought we were going to make money working there, and suddenly you look at a statement online and it’s (worth) hundreds and hundreds of thousands (of dollars). And it’s beyond your wildest dreams working there that you could make that kind of money.” It may not have forced a corrupt decision, but it certainly provided an incentive. And the company provided added “incentive” by telling managers that they would be fired if Moody’s lost a single deal.

And don’t think that the fraudulent activity by the ratings agencies was only restricted to MBS securities. Even in the 1990s, an analyst of exotic assets at Moody’s felt pressure to provide positive ratings despite his concerns. He says, “In my days, I was pressured to do nothing, to not do my job. I saw in two instances — two deals and a rental car deal — manipulation of the rating process to the detriment of investors”. My tangential experience with a ratings agency involved a company that was trying to improve its own rating in order to bring down borrowing costs. I certainly got the impression from talking to people near, but not directly involved, in those negotiations, that the fee for the ratings agency’s investigation into the company’s financials would have some influence on the rating received. I have no direct knowledge that any of that occurred nor do I know whether the company or the rating agency was driving that impression. But there were people in the firm who definitely felt that way and this was probably a decade before the financial crisis. Like everything on Wall Street, it was pay to play. And when you get caught, you pay some more and continue with business as usual. It is all merely the cost of doing business.