Every now and then some journalism breaks out across this fair nation:
As the housing market collapsed in late 2007, Moody’s Investors Service, whose investment ratings were widely trusted, responded by purging analysts and executives who warned of trouble and promoting those who helped Wall Street plunge the country into its worst financial crisis since the Great Depression.
A McClatchy investigation has found that Moody’s punished executives who questioned why the company was risking its reputation by putting its profits ahead of providing trustworthy ratings for investment offerings.
Instead, Moody’s promoted executives who headed its “structured finance” division, which assisted Wall Street in packaging loans into securities for sale to investors. It also stacked its compliance department with the people who awarded the highest ratings to pools of mortgages that soon were downgraded to junk. Such products have another name now: “toxic assets.”
Read the whole damning report. And can I say it is about damned time. There is a pulitzer here.
Hunter Gathers
Something tells me this won’t be the headline on Drudge…..
DBrown
Right – like all the Intel “experts” that bush/cheney punished for the bad intelligence on WMD’s. When hell … never mind, bad advice.
Starfish
Did you read this story about how a Moody’s employee gave insider information to some billionaire who is under investigation by the SEC now?
jeffreyw
When you pay a man well to tell you what you want to hear, you get good news pretty damn often. Or somethin.
Leelee for Obama
Yeah, this ain’t news, just newsworthy that McClatchy is reporting on the depth of the corruption. We’ve known for a long while that none of this financial hocus-pocus could have happened without the complicity of the ratings agencies. That’s where even virgin investors look for validation on decisions. It’s like Arthur Anderson and Enron-they cooked the books and made things look just ducky and their accountants said, “Hells yeah, it’s golden!”
If this kind of information doesn’t force a regulation bill that makes Big Money feel like it’s wearing a cast-iron jock strap, nothing EVAH will. Just like the Health Insurance Cartels showing their butts with that bogus analysis-somehow the truth comes out. It’s what gets done with the truth that matters.
God, I’m tired of this BS.
Punchy
So the execs that ran Moody’s were….uh….rather moody.
me
Heh.
mistermix
And, more often than not, McClatchy is the one doing it, not the Times and the Post.
inthewoods
It’s great that there is journalism going on out there, but when will the SEC or some other government body actually bring some damage down on these rating agencies? I remember hearing that CALPERS was suing the rating agencies, but I haven’t heard anything else about that in a while.
Starfish
Off topic. Amazon and Wal-Mart are getting into a price war over books. How many copies of Going Rogue will John get for Christmas if Wal-Mart has them priced at $8.99?
inthewoods
Found an article from July in the NYtimes on it:
http://www.nytimes.com/2009/07/15/business/15calpers.html
My favorite quote:
Ten days after Moody’s had downgraded some securitized packages in 2007, it issued a report titled “Structured Investment Vehicles: An Oasis of Calm in the Subprime Maelstrom.”
In my opinion, without changing the rating agencies, nothing has changed – it is simply amazing to me that no one is looking at the issue in the Obama administration. If you look at the chain of destruction that is structured finance, it all hinges, in my opinion, on the rating agencies.
Nethead Jay
@mistermix: Yeah, McClatchy is about the only outfit that does this on a somewhat consistent basis. I I hope that they bite down tight on this story and follow it to the bloody end.
Perry Como
Don’t miss Taibbi’s latest about the Wall Street crime syndicate.
MattF
Yeah, well. Another way of putting it is that Moody’s (and the other ratings companies) figured out how to securitize their services. And then they discovered that it’s hard to put a value on a security that no one wants to buy. Bzzzzt!!!
Brachiator
@Leelee for Obama:
It’s one thing to know it in the typical “capitalism is bad” and “the free market is rigged” informal conversational way, but it’s another thing altogether to prove it with hard evidence and to successfully prosecute Moody’s for its wrongdoing.
Good example. Ironically Arthur Andersen began as a firm which emphasized honesty and help develop accounting standards. But in the aftermath of the Enron mess, Andersen ended up surrendering its license to practice as CPAs in the United States and even though they later won a big case in the Supreme Court, they are no longer a viable business. Losing the ability to function as a CPA firm, and having lost its reputation for any kind of reliable analysis, was the equivalent of a corporate death sentence.
If the Obama Administration has any courage at all, they will bring the hammer down on Moody’s. If he and the Democrats fail at this, then anything they mumble about regulation will be feeble bullcrap.
CALPERS filed suit in July, and the case is going through the system. One part of their suit contains this little gem:
More recently, California Attorney General Jerry Brown issued subpoenas to the three credit ratings agencies as part of a state probe. The attorneys general of Connecticut and New York have previously opened separate investigations as well.
http://sfappeal.com/alley/2009/09/jerry-brown-subopenas-credit-rating-agencies.php
Maude
@Starfish: This is great. The writers of series that have written the first book and then may have as well word processed the next million are in an uproar. They want their money. They deserve their money. They wrote those book to fulfill their souls, and where’s the money?
Oh, did I mention that some of those writers write for money?
Books have become too expensive. The publishers, agents and writers have excluded a lot of readers.
If a parent doesn’t have much money, how can he or she buy a book for a child?
There used to be dime novels.
It could explain why more people don’t buy books.
inthewoods
@Brachiator:
I think there’s a strong correlation between companies that are supposed to act like watchdogs, their breakdown, and the fact that they are public companies. Too much need to focus on quarterly earnings makes the executives push to maximize earning at any cost. Especially since there is no consequence, for the most part, for these executives.
Alan
Golly, it’s almost as if there’s a culture of corruption that someone might suspect emanates from some powerful investment banks on Wall Street. But gee whiz, that’s just silly.
YellowJournalism
@Maude: I find that the dollar stores and the discount tables and shelves at some of the large chains can be a goldmine of decent children’s books. Some of my older son’s favorite ones were obtained either at the Dollar Tree by grandma or by me from the Chapters discount shelves.
However, if I want to buy one of the classics like “Where the Wild Things Are” or some Dr. Suess, I’m paying 10-20 dollars, sometimes more! These are children’s books with fewer than 40 pages.
kay
@Brachiator:
It’s difficult, because ratings agencies are in no sense “watchdogs”.
I didn’t know that. They don’t have any legal duty at all, to customers or buyers at all, other than the shaky “negligent misrepresentation” that Brown seems to be pursuing.
In the article, Moody’s doesn’t dispute that they did no independent data analysis at all: they simply accepted whatever they were given, and based an opinion (in the form of a rating) on that.
I believe that if an individual ethical actor within Moodys returned an opinion (rating) that didn’t please the customer, they were fired, but that’s going to be really difficult to prove.
Ratings are protected under free speech. Huh.
I do think it’s laughable that Moodys says bonuses weren’t based on Moodys profits within a unit.
Okay. Sure. What they hell were bonuses based on, then?
Route66News
I had a strong hunch that there was something fishy going on at Moody’s. And good for John Cole to keep hammering on this issue for the past year or so.
That’s the second major news coup by McClatchy in recent years. First, it debunked the reasons for war against Iraq before the war started, and now this.
Brachiator
@inthewoods:
Are you suggesting that ratings be done by a government agency? You might get something as toothless as the SEC, which couldn’t watchdog Bernie Madoff or the other Ponzi schemers who have fallen out with the recession.
Also, we saw that the Bush/Cheney regime either staffed various agencies with incompetent cronies or simply prevented them from doing their jobs via executive orders.
People decide how greedy they want to be, or how open to corruption they want to be. I don’t know that there is an easy fix here, aside from prosecuting the hell out of these firms.
One curious thing, as John Cole points out, Moody’s fired a lot of their honest people, and happily turned itself into a den of thieves. They then seem to develop a mindset that they should be able to do whatever they want, and no one should be able to stop them.
Very odd.
Starfish
@Maude: I don’t know if you have read anything about CPSIA. It is the legislation to get lead content out of children’s items. However, it is so expansive that selling children’s books that were printed before 1985 illegal to sell so many used bookstores are having to throw them away.
Lately, at my house we have been using this to swap books. You pay postage if you are the one sending the book, but all in all this has helped us acquire new books without needing to acquire more shelf space.
I try not to swap any first time authors because I feel bad for actual starving writers, but do I honestly need to keep huge volumes in series that authors refused to end or have properly edited because they were making the big bucks?
inthewoods
@Brachiator:
No, I would not suggest that the government take over the function, but that the system should be changed. As long as the rating agencies continue to enjoy monopoly status, a system I’ve heard proposed that makes some degree of sense would be to have an exchange where a bond is submitted for rating, and it is then given, at random, to a rating agency. The agency would rate the bond, and that rating would be final to prevent firms from rate shopping like they currently do.
I don’t believe that would stop all fraud, but the system needs to be changed to stop the current manipulation that occurs. There are probably better solutions as well – I’d just like to see the government take some form of action. My understanding is that there are numerous bills circulating in Congress – the question is whether any will see light of day, or whether the financial lobby will keep them off the floor.
Ohio Mom
Snopes has somethings to say about CPSIA.
I buy almost all my kid’s books at thrift stores, yard sales, the annual Friends of the Library book sale, The Half-Price Book Store, etc., and very ocassionally, T.J.Maxx (I found TJM a good source of reasonably priced board books, when we were at that stage). Haven’t noticed any drop in what’s available, quantity or quality-wise, since CPSIA was put into effect.
Brachiator
@kay:
They aren’t watchdogs, and I don’t have a problem with that. That they don’t have any legal duty to customers or buyers is nonsense.
Here’s where these weasels are trying to offer a super-sophisticated argument that would probably impress Justices Roberts and Scalia.
But this is as bizarre as if an accounting firm said that their audit report did not have to be accurate or meaningful because it was protected under free speech. This may be true, but it is irrelevant.
Imagine that you went into a casino. And instead of posting the true odds for poker, blackjack or other games, the casino just made stuff up and said that they were protected because it was free speech. And on top of this, casinos started rigging games and using crooked dice and fixed slot machines (not like this ever happens now*).
Soon, the only people going to Vegas or Atlantic City would be those who were hard-core gambling addicts and maybe friends of the casino who knew that the suckers were being fleeced in their favor.
If the ratings agencies want to maintain that their output is fiction, then there is absolutely no reason for anyone, anywhere to use them to determine whether or not to invest in a company, or to buy any particular financial instrument.
Another example: Underwriters Laboratories is not a government watchdog agency, but an independent product safety certification organization. But your life and mine depends on the UL certification being meaningful. If they said that they were just making shit up, and it didn’t matter because their certification was protected free speech, people would rightly go nuts, and something would change or the UL people would go out of existence.
Moody’s and the other rating agencies may be outsmarting themselves. They think that all the other financial wiseguys are going to keep a good thing going. I’m not too sure.
Brachiator
@kay:
My original response is in moderation for some reason. Here is a revised (and hopefully more acceptable) version.
Here’s where these weasels are trying to offer a super-sophisticated argument that would probably impress Justices Roberts and Scalia, but nobody else.
But this is as bizarre as if an accounting firm said that their audit report did not have to be accurate or meaningful because it was protected under free speech. This may be true, but it is irrelevant.
Imagine that you went into a casino. And instead of posting the true odds for poker, blackjack or other games, the casino just made stuff up and said that they were protected because it was free speech. And on top of this, casinos started rigging games and using crooked dice and fixed slot machines (not like this ever happens now).
Soon, the only people going to Vegas or Atlantic City would be those who were hard-core gambling addicts and maybe friends of the casino who knew that the suckers were being fleeced in their favor.
If the ratings agencies want to maintain that their output is fiction, then there is absolutely no reason for anyone, anywhere to use them to determine whether or not to invest in a company, or to buy any particular financial instrument.
They should also refund the money of people who depended on them to render a meaningful assessment on the quality of the companies and products they rate.
dadanarchist
McClatchy comes through again. As others mentioned, they McClatchy DC bureau are the only ones who got the WMD and Iraq war right.
Probably because their journalists are not aspiring to be “jounamalists” so that they can get invited on the Situation Room or the Sunday Talk Shows.
Refreshing – yet simultaneously disturbing that journalists producing journalism would be so shocking.
kay
@Brachiator:
I don’t think that’s true about accounting firms, Brachiator. I think that’s a poor comparison.
CPA’s have an individual professional duty, and it’s enforcable, as against that individual CPA. Accounting firms have a duty to their customers that can be measured. There are a whole elaborate set of accounting standards. The duty is measurable.
What’s the measure here? This is an opinion, and there’s no set of standards behind it.
A better comparison is a financial advisors duty to his customer. Unless it’s based on a contract, what is the measure?
Look at the Brown doc you posted. AG Brown knows he’s going to have trouble withe the “duty” part of his claim. That’s why he’s essentially fishing (good for him, incidentally).
Brown has damages. What he doesn’t have is the duty that was breached. He as much as admits that.
It’s a problem.
Maude
@YellowJournalism: And Starfish, Thank you for the info. I didn’t know that there was lead in printed books before 1985. The places to buy kid’s books are good to know. I only see children’s book at the library. I take books out of the library. I can’t spend $24.99 for a book.
I wrote a book for four year old girls. I did drawings. This thing can be published with the cheapest paper and inks. It wouldn’t hurt it.
The fancy illustrated kid books are very expensive.
I would dearly like to blame agents for all of the costs, but that wouldn’t be fair.
Kay, I read a book about the recent crisis and that the ratings agencies were using outdated methods and inaccurate information on top of not knowing what they were doing. The point the author made was that the agencies had such a huge amount of power over how much a stock or whatever they were selling would cost and how high it would rise in price.
Rotters, all of them.
kay
@Brachiator:
What the financial crisis has taught me is this: in the absence of industry regulation or professional standards that are enforceable against individuals, people (like you and me, inevitably and sadly) who have to deal with our huge interconnected finance sector are completely dependent on the ethical behavior of individual actors.
That’s what fell apart here. Those who weren’t purged stopped caring about the firm reputation or their individual reputations. They were bought off.
What’s surprising to me is not that it fell apart, but what a wing and a prayer we were riding on. I’m amazed it lasted 8 years.
Who knew people might be ethically compromised when you tie their compensation to how well and consistently they lie?
Conservatives must be the most naive and trusting souls on the face of the planet if they think this is sustainable, or even a “system”. It’s a fairy tale.
mclaren
The fundamental problem here remains cognitive bias of the kind Kahneman and Tversky won their Nobel for in psychology.
Unfortunately, cognitive bias proves so pervasive that it afflicts nearly everyone in situations like a financial bubble. Literally everyone gets sucked in. Regulators, bond ratings agencies, accounting firms, supervisory boards like the SEC, investors, investment banks, mortgage lending firms, reinsurers, everyone.
Clearly Moody’s ought to be crushed, its execs sent to prison for life, the firm disbanded. Problem is, we can be absolutely certain that the next time there’s a huge financial bubble, whatever rating agency replaces it will fall into the same trap of cognitive bias, just as whatever accounting firms replace Arthur Andersen will get sucked in by the next bubble.
You might deny this by claiming, “Oh, no, if there are actual criminal penalties, these companies would never sign off on fraud,” but it’s not as simple as that. Much financial dealing apears on the surface like obvious fraud — for example, banks count outstanding loans on their books as assets, while paying off the loan early counts as a big hit to that asset. That’s insane and from a commonsense point of view fradulent, but that’s the way it works. People who rent out apartment buildings get to take huge depreciation on their taxes even though the value of the property typically rises over time. That’s obviously fraudulent, yet accounting firms routinely sign off on those kinds of tax deducations, and properly so, because even though it’s grossly fraudulent it happens to be the law.
kay
@Maude:
I don’t think the issue is if they “didn’t know what they were doing”.
I mean, they’d love if that were it. “Mistakes were made”. Done.
What I don’t know is this: do they have measurable standards that they did not adhere to ? Are the employees licensed? I can’t get a handle on what the measure is.
That’s why I don’t like the accounting comparison. There’s a measure there.
Look, I think they should be completely discredited and no one in their right mind should rely on them, ever again, but I don’t know that that gets me anywhere.
Brachiator
@kay:
As noted earlier, Arthur Andersen violated every rule and principle it stood for when it did work for Enron and other clients. They even won a Supreme Court decision, but still died as an ongoing concern because no one could trust their work anymore.
Also, a CPAs duty is not just to their customers. They also responsible to potential investors in a company, not just to that company’s management.
A ratings agencies work product is based on some kind of analysis. If they say that one bond is AAA and another is junk, this opinion is either based in some way on easily verifiable material (a company’s cash flow, taxes owed, sales volume, etc) or it is fiction.
You can go broke depending on the recommendations of a financial advisor, and they would still have fulfilled their contractual obligations. But their reputation is another matter, and it is this that keeps them in business.
There are two things at play here. I agree with you about Brown, and the problems that he is facing with regard to prosecuting Moody’s and others for wrongdoing.
But this a separate issue is how investors respond to Moody’s claims that their ratings are nothing more than opinion. If you hung up a sign for Kay’s Rating Agency, why would anyone go to you instead of to Moody’s if you were both just offering your opinions?
The ratings agencies claim that they perform a useful function with respect to the orderly operation of financial markets. If their ratings are nothing more than just-so stories, then they have no reason to exist. Whether they can be sued for their folly is another matter.
kay
@Brachiator:
I understand reputational risk, but then we’re right back to “buyer beware”.
Elliot Spitzer said, on C-Span, before he was targeted and removed, that he loved markets, and “we’re cutting our own throats” because average investors will no longer trust markets.
He said it with real dismay, as if he didn’t understand why finance and lending would discredit their own industry.
I agree with him.
There’s some solace in that, to the California pensioners, I guess, that ratings agencies “cut their own throats” Not much, but some.
D-Chance.
The housing bubble thing was so last year. Moveon.
Seriously, that’s the problem with this time of “journalism”. It’s easy to write and report after the window of impact has closed. Especially when all of the participants are either out of office, or otherwise far removed from the picture. Yeah, criticize the guy once he’s flown off to the Barbados with his cash stashed away safely in Switzerland or the Caymans.
It may result in calls for a Pulitzer (heh, yeah…) and calls of “see, SEEEE?!” from a few rogues; but, it all results in nothing of substance, other than the majority of readers shaking their heads and saying, “oh, well… hey, what about that Ballon Boy?”.
Leelee for Obama
@kay: Ah, yes, Eliot. Man, I loved him when he was my Atty Gen. back in NY. You just know that his private life being so publicly exposed was due to his earned reputation for crucifying the Big Money bastards, and the credibility he had built over years of taking them to task. I’ve said it before, he didn’t start schtupping prostitutes after he was Governor. People always knew about it, I”ll bet, but they saved it for when they really needed to destroy him. Sad-Clinton comes to mind. When you know people are looking to bury you alive, handing them a shovel is suicidal. These guys play for keeps.
The saddest thing is that we, as a nation, are no longer an agrarian society, and we have lived on credit and no real wage growth for almost 25 or 30 years! I am really frightened by what comes next, more now than before-somehow I feel so vulnerable, and I’m fairly sure I’m not alone.
Brachiator
@kay:
It’s more than that. The successful operation of financial markets, with respect to public companies, depends upon all investors being able to have access to some generally accepted information before they consider investing. Otherwise, the entire market becomes a game of insider trading.
Moody’s was selling what was supposedly expert opinion. If their ratings have no meaning, and are for sell to the highest bidder, then in the absence of any reliable alternative, then we have a serious problem with the entire financial system.
If your city or state needs to issue bonds to help schools, and the rating agencies are useless, then your city or state cannot accurately set the interest rate for the bonds. Investors might demand a higher rate of return than before to insure themselves against potential losses. This in turn increases the cost to local government.
This is why I think that the issue is not simply resolved by regulation or putting pointlessly artificial limits on executive compensation. Moody’s and the other agencies want to pretend that everything is OK and that investors can still rely on them, but this is absurd if they simultaneously claim that they base their ratings on the statistical equivalent of astrology and the Psychic Friends Network.
I’m not sure that Spitzer was targeted. He certainly did himself in, and gave his enemies the best weapon to use against him. And like Jonathan Edwards, Spitzer’s own arrogance and stupidity undermined someone who could have been a valuable public service.
Spitzer’s case also demonstrates an issue of ratings. He was using what he was told were 4 diamond escorts, women who were hot and sophisticated. But since there was no independent expert opinion behind the ratings, and the escort service rated itself, his 4 diamond escort was little more than a New Jersey chippy.
The folks at Goldman Sachs are hiding in plain sight, handing out bonuses and making deals as though the recession is somebody else’s problem.
Leelee for Obama
This is the thing that should turn the tide. I’m not sure it will, though. This kind of opportunistic profit in the face of near universal misery should have a chilling effect on the endless quest for more at the expense of the Nation. I know that we have a history of the wealthy and powerful just steam-rolling over the lowly, often with the assistance of government, but this time seems to be crushing more people than before. Am I wrong? Or is it that globalization has made recovery seem to be out of reach because the recovery will not supply jobs here at home. I don’t want to be selfish, I know there are people all over the world who are much worse off, and less likely to get any help at all-but if the richest country in the world can’t pull back from this economic crisis, and the uber-class seem to be able to make it work for them, what the hell is next?
Brachiator
@Leelee for Obama:
I don’t know if we are just paying more attention to the problem, but there seems to be an increase in powerful people brazenly trying to get away with outrageous corruption. And the pattern is always the same.
In Britain, members of parliament dumped the guy who was in charge of auditing their expenses. Then, the MPs went on a binge (one spent over $200,000 in expenses, falsely claiming that this was for a necessary second home in London near Parliament). Now even though MPs have come under increased voter scrutiny in the light of their roles in the global financial mess, they are defiantly refusing to pay their expenses, even using their journalist friends and relatives to smear whistleblowers.
http://www.dailymail.co.uk/news/article-1221161/Quit-Jacqui-say-thirds-voters–neighbours-tried-smear-tell-relief-complaint-upheld.html
And keep in mind that part of the Goldman Sachs schemes originated in the London office, and the UK and the US have resorted to similar approaches in bailing out the financial industry,
But I guess what I find perplexing is that instead of trying to clean up the mess and do better, too many of these people are instead doubling down and attempting to use their influence with friendly Republican and Democratic legislators (yeah, I’m talking about you, Senator Dodd) to keep the scam going.
Hell, even Bernie Madoff finally gave in and confessed. But these other guys are totally shameless. And they don’t seem to care whether or not they bring the country down with them.
Leelee for Obama
This is what I mean. There seems to be no level of awful that they see as too high. Profit, in and of itself is no sin, but this kind of behavior borders on criminal-at least I think it does. Why is Madoff in prison, and these guys, who screwed many more people for much more money, making even greater profits on the taxpayers loan, with not a wit of shame, or fear of retribution? I guess they think we should be grateful they can pay us back? Fuckers!
Of course, you’re right about the politicians-q’uel suprise!
Viva BrisVegas
We have moved into a post industrial economy and our political masters have no idea how to manage the transition.
Jobs to make things have moved forever, and have been replaced by far fewer but richer jobs which now involve the massaging of symbols, e.g. the finance sector.
This is why wages have been stagnant for a generation and the the investor class now arrogates to itself more and more of the spoils. Leaving the middle class out in the cold with its nose pressed up against the window wondering how to get back inside where it’s warm.
The housing bubble crashed for a lot of reasons, but basically because people couldn’t afford to pay back their mortgage. One of the reasons that people couldn’t pay? Because wages are stagnant. This seems to get remarkably little airtime.
I’m not going out on much of a limb here, but I predict a jobless recovery. After each future recession there will be fewer and fewer jobs available in the recovery, until finally there is left only two classes of people the rich and the underemployed poor. Something like 1960s Brasil.
Over the longer term the US economy is stuffed unless it can find the political will and means to transfer wealth from the investor class to the consumer class. Because the invisible hand just ain’t going to do it.
NYT
The big unreported story of the meltdown is who were the end-buyers of this toxic garbage. It must have been obvious to anyone with a pulse that these CDOs and CLOs were duds well before 2008.
In a sane world the stories about the “placement agents” who got kickbacks from hedge funds for investments by CALPERS and other pension funds would be a huge story.
mclaren
VIva BrisVegas said:
RememberNovember
How soon before they start deploying robot drones and battle droids while hovering from giant circular space states. Will we have to call in the Jedi? Will Obama Wan Kenobi have to chase Hen’Ree Paulson to his secret lair which is protected by Darth Cheney?