Wall Street bullied us, claim ratings agency staff

Staff at the credit ratings agency Moody's were bullied by Wall Street bankers, harassed by profit-hungry bosses and starved of the time and resources they could have used to check their disastrous ratings of mortgage derivatives, an inquiry into the causes of the credit crisis was told.

In testimony that provided a new glimpse into final period of the credit and housing boom from 2005 to 2007, former Moody's managers testified that they felt bullied and boxed into ascribing imperfect or artificially high ratings to billions of dollars of mortgage-related investments.

Thanks to their gold-plated ratings that Wall Street banks were able to parcel up even the most unlikely US mortgages for sale around the world to investors who believed they were buying bonds that were as safe as US government debt. While bankers earned huge fees for themselves from the trades, they ultimately poisoned the financial system when the US housing market collapsed.

The 11-month old Financial Crisis Inquiry Commission is zeroing in on the relationship between Wall Street and the credit ratings agencies. The hearing about Moody's also featured a star turn from one of the company's biggest investors, the billionaire investment guru Warren Buffett. But it was details of the interactions between the ratings agency and its clients on Wall Street that proved most illuminating at yesterday's hearing.

Eric Kolchinsky, managing director in the department that rated collateralised debt obligations (CDOs)– the derivatives created from mortgage-backed securities – said his bosses made it clear his main task was to raise the volume of business. That meant making concessions to bankers who created CDOs and paid for Moody's work.

"Concern about credit quality took a back seat to market share," Mr Kolchinsky said. "While there was never any explicit directive to lower credit standards, every missed deal had to be explained and defended. Management also went out of its way to placate bankers and issuers.

"The focus on market share inevitably lead to an inability to say 'no' to transactions. It was well understood that if one rating agency said no, then the banker could easily take their business to another."

He said analysts had growing suspicions that Wall Street was packing CDOs full of increasingly dubious mortgages, but in ways that were difficult for Moody's to detect. Gary Witt, another ex-managing director, said he argued repeatedly for more resources to properly investigate the underlying mortgages and to test more of the assumptions that went into the company's models. He quit when his requests were repeatedly denied.

Both men said Wall Street bankers would exercise their power as the rating agencies' clients. Mr Kolchinsky said they were granted requests to bar unsympathetic analysts from particular projects, though this was denied in later testimony by the company's chief executive, Raymond McDaniel. Mr Witt said bankers would go over analysts' heads to appeal to their superiors to improve ratings. "They would pull any lever they could," he said.

Mr Kolchinsky called it "a chess game which we kept losing", and he said the balance of power shifted even further in the bankers' favour after they stepped up the pace of CDO creation in 2006, using derivatives of derivatives.

On both sides of the Atlantic, politicians and regulators are considering ways to reform the rating process. In the US, Congress is examining proposals that will force investors to do more of their own research, instead of relying on ratings to make buying decisions. And the European Commission yesterday proposed an EU-wide securities watchdog to regulate the rating agencies and force firms to disclose payments from Wall Street banks and other bond issuers.

Start your day with The Independent, sign up for daily news emails
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Pricing Analyst

£30 - 35k: Guru Careers: We are seeking a Pricing Analyst to join a leading e-...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K YR1: SThree: At SThree, we like to be dif...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is a mul...

Guru Careers: C# Project Team Lead

£55 - 65k (DOE): Guru Careers: A unique opportunity for a permanent C# Develop...

Day In a Page

Fifa corruption: The 161-page dossier that exposes the organisation's dark heart

The 161-page dossier that exposes Fifa's dark heart

How did a group of corrupt officials turn football’s governing body into what was, in essence, a criminal enterprise? Chris Green and David Connett reveal all
Mediterranean migrant crisis: 'If Europe thinks bombing boats will stop smuggling, it will not. We will defend ourselves,' says Tripoli PM

Exclusive interview with Tripoli PM Khalifa al-Ghweil

'If Europe thinks bombing boats will stop smuggling, it will not. We will defend ourselves'
Raymond Chandler's Los Angeles: How the author foretold the Californian water crisis

Raymond Chandler's Los Angeles

How the author foretold the Californian water crisis
Chinese artist who posted funny image of President Xi Jinping facing five years in prison as authorities crackdown on dissent in the arts

Art attack

Chinese artist who posted funny image of President Xi Jinping facing five years in prison
Marc Jacobs is putting Cher in the limelight as the face of his latest campaign

Cher is the new face of Marc Jacobs

Alexander Fury explains why designers are turning to august stars to front their lines
Parents of six-year-old who beat leukaemia plan to climb Ben Nevis for cancer charity

'I'm climbing Ben Nevis for my daughter'

Karen Attwood's young daughter Yasmin beat cancer. Now her family is about to take on a new challenge - scaling Ben Nevis to help other children
10 best wedding gift ideas

It's that time of year again... 10 best wedding gift ideas

Forget that fancy toaster, we've gone off-list to find memorable gifts that will last a lifetime
Paul Scholes column: With the Premier League over for another year, here are my end of season awards

Paul Scholes column

With the Premier League over for another year, here are my end of season awards
Heysel disaster 30th anniversary: Liverpool have seen too much tragedy to forget fateful day in Belgium

Liverpool have seen too much tragedy to forget Heysel

Thirty years ago, 39 fans waiting to watch a European Cup final died as a result of a fatal cocktail of circumstances. Ian Herbert looks at how a club dealt with this tragedy
Amir Khan vs Chris Algieri: Khan’s audition for Floyd Mayweather may turn into a no-win situation, says Frank Warren

Khan’s audition for Mayweather may turn into a no-win situation

The Bolton fighter could be damned if he dazzles and damned if he doesn’t against Algieri, the man last seen being decked six times by Pacquiao, says Frank Warren
Blundering Tony Blair quits as Middle East peace envoy – only Israel will miss him

Blundering Blair quits as Middle East peace envoy – only Israel will miss him

For Arabs – and for Britons who lost their loved ones in his shambolic war in Iraq – his appointment was an insult, says Robert Fisk
Fifa corruption arrests: All hail the Feds for riding to football's rescue

Fifa corruption arrests

All hail the Feds for riding to football's rescue, says Ian Herbert
Isis in Syria: The Kurdish enclave still resisting the tyranny of President Assad and militant fighters

The Kurdish enclave still resisting the tyranny of Assad and Isis

In Syrian Kurdish cantons along the Turkish border, the progressive aims of the 2011 uprising are being enacted despite the war. Patrick Cockburn returns to Amuda
How I survived Cambodia's Killing Fields: Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape the US

How I survived Cambodia's Killing Fields

Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape to the US
Stephen Mangan interview: From posh buffoon to pregnant dad, the actor has quite a range

How Stephen Mangan got his range

Posh buffoon, hapless writer, pregnant dad - Mangan is certainly a versatile actor