Moody's CEO calls subprime ratings 'disappointing'
June 2, 2010 "Moody's is certainly not satisfied with the performance of
these ratings" and is taking steps to improve its rating process,
says CEO Raymond McDaniel in prepared testimony.
Still, McDaniel says investors should use ratings as a tool,
"not a buy, sell or hold recommendation."
McDaniel will testify Wednesday alongside billionaire investor
Warren Buffett before the Financial Crisis Inquiry Commission.
Berkshire Hathaway, which Buffett leads as chairman and CEO, is
Moody's largest shareholder.
Rating agencies like Moody's, Standard & Poor's and Fitch
Ratings have been criticized for giving unrealistically high
ratings to complex investments backed by risky mortgages and other
assets. When homeowners defaulted on their mortgages, the rating
agencies downgraded billions of dollars of investments at once.
That helped spark the financial crisis.
Lawmakers have also accused the industry of having a conflict of
interest because the agencies are paid by the banks whose
investments they rate.
The congressionally chartered panel subpoenaed Buffett to
testify on the credibility of credit ratings and the investments
made based on those ratings.
Despite his company's stake in Moody's, Buffett has said he
never relies on credit ratings when making investment decisions
because he makes his own judgments on companies.
The FCIC issued its first subpoena in April to Moody's Corp.,
saying the company failed to provide documents it requested. FCIC
chairman Phil Angelides said the company started to comply with the
request after receiving the subpoena.
At Wednesday's hearing, the panel will probe how the agencies
decide on their ratings, how those ratings contributed to the
financial crisis and whether the agencies' business model is partly
to blame.
One transaction that could come up is a Goldman Sachs deal
called Abacus, a complex mortgage-related investment that later
plunged in value. Both Moody's and Standard & Poor's gave the
Abacus deal a AAA rating, the safest rating they offer.
The government has filed civil fraud charges against Goldman,
alleging it failed to tell investors that one of its clients, hedge
fund Paulson & Co., was betting against the securities.
Credit rating agencies came under fire in April from the Senate
Permanent Subcommittee on Investigations, which is also probing the
causes of the financial crisis. The panel's chairman, Sen. Carl
Levin, said the Senate's regulatory overhaul should curb the
industry's inherent conflicts of interest.
Banks generally want higher ratings to make the securities they
offer more attractive to investors. Former executives have
acknowledged that competition within the industry often led the
agencies' analysts to rate high-risk securities as safe.
To tackle the conflict of interest problem, the Senate's version
of the financial overhaul would end banks' ability to choose the
agencies that rate their investments. An independent board,
appointed by regulators, would choose the rating firms.
But critics of that plan point out that the agencies would still
be paid by the banks whose products they rate. That means the
ratings could be influenced by those banks.
Others have questioned whether regulators - who themselves
missed warning signs leading to the crisis - should choose which
agencies rate which financial products.
The FCIC is a bipartisan group created by Congress to examine a
range of issues surrounding the financial crisis.