Posted on Wed, Jun. 02, 2010
last updated: March 15, 2013 11:58:14 AM
NEW YORK — The chief executive officer and the former president of Moody's Investors Service both offered regret Wednesday for the abysmal performance of their ratings on complex bonds backed by U.S. mortgages but denied any wrongdoing.
Testifying before a field hearing in the world's financial capital, the executives told the Financial Crisis Inquiry Commission that like everyone else they were caught off guard by the sudden and deep slide in national home prices and subsequent financial crisis.
CEO Raymond McDaniel said in written remarks released ahead of his testimony that he was "deeply disappointed" by the performance of the credit ratings issued by Moody's for complex bonds called mortgage-backed securities.
"Moody's is certainly not satisfied with the performance of these ratings. Indeed, over the past few years, there has been an intense level of self evaluation within the organization," said McDaniel, the CEO and chairman of a once proud company that has seen its share value slide down with its reputation.
Moody's reputation fallen so much that the congressionally mandated commission, which must report later this year on the financial crisis, chose to hold a hearing exclusively on Moody's and not the rest of its competitors.
In a coup for the panel, the controversial former president of Moody's was also called to testify. A McClatchy investigation last October detailed how Brian Clarkson bullied analysts and compliance officials when their decisions threatened market share and the lucrative earnings Moody's garnered from rating the complex securities, generally called structured finance products.
Clarkson, who rose to president of Moody's after heading the structured finance division that effectively took over top regulatory and management positions, was unapologetic on Wednesday.
"During the period of 2000 to 2006, Moody's structured finance revenue grew from approximately 35 percent to 43 percent of Moody's Corporation's overall revenue. This is significant growth," Clarkson said in written remarks. "I reject any suggestion, however, that Moody's sacrificed ratings quality in an effort to grow market share."
That flies in the face of what former Moody's executives told McClatchy in last year's investigation. They described Clarkson, who resigned with a lucrative exit package in August 2007, as getting in their face whenever they raised obstacles to rating a complex deal, often boasting that they weren't the ones responsible for Moody's surge in revenues.
One former Moody's managing director, Eric Kolchinksy, described the effect of such pressure to the inquiry commission on Wednesday.
"It was harder to say no than to say yes," said Kolchinsky, who alleges he was pushed out for raising concerns about several complex deals that got investment-grade ratings.
E-mails made public in a late April hearing by the Senate Permanent Subcommittee on Investigations showed how Moody's and its chief competitor Standard & Poor's raced to the bottom to win ratings business from Wall Street investment banks. During the housing boom when the complex bonds were widely sought after, Moody's share prices ran up from about $13 a share to a high of $72 a share.
That brought an enormous windfall to the largest shareholder in Moody's, billionaire investor Warren Buffett. He was scheduled to testify before the commission on Wednesday, forced to so do by a subpoena, and Buffett declined to issue written remarks ahead of his testimony.
A second McClatchy investigation earlier this year revealed the two high-level executives of Moody's reached out to Buffett to warn of an impending implosion of structured finance products and were rebuffed, told by Buffett that he was a hands-off investor. At one point he owned 20 percent of Moody's, but has since pared his holdings down to about 13 percent. He declined to comment for both McClatchy investigations.
Moody's was the target the of Financial Crisis Inquiry Commission's first hostile subpoena, issued in late April. At the time, panel leaders accused Moody's of trying to run out the clock by dragging its feet on providing documents.
The company's CEO, McDaniel, faced hostile questioning in April by the Senate investigative panel. Then, he was forced to make an embarrassing acknowledgment that he was unaware his company continued to provide investment-grade ratings to complex bonds backed by junk U.S. mortgages even after Moody's had downgraded billions of dollars worth of these deals in summer 2007.
As a credit-rating agency, Moody's enjoys free-speech protections since its business amounts to providing opinions about the credit worthiness of bonds and other securities. But the company is now facing class-action lawsuits, a suit by the state of Connecticut and a probe by the California attorney general because not only did it give an opinion but also consulted on the composition of complex deals it rated.
Legislation moving through Congress will impose tougher rules on the ratings agency, perhaps even having an outside body assign them to rate complex deals instead of having Wall Street firms select them.
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