Ratings Agencies Switch Analysts To Please Bankers And Issuers

Posted by John Carney, May 23, 2008, 10:40am

Ratings agencies are all too happy to please debt issuers by switching out analysts who don't understand that their job is to be "responsive" to the issuers, The Wall Street Journal reports. Although the Journal describes the practice as "infrequent," DealBreaker's sources disagree.

"This happens a lot more than the article lets on," one former employee at a ratings agency says.

At Request of Bond Issuers or Bankers, Credit-Rating Firms Switch Analysts [Wall Street Journal]

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Posted by guest, May 23, 2008 12:17PM

I'm tired with all the rating agency bashing... as a former employee of the CDO group of Moody's, I assure you (and you can also quote me as an anonymous source like WSJ did), "that this does not happen a lot more than the article lets on." Analyst were replaced or changed from deals if they did not provide the quality of service that was expected of them, and that is being responsive and returning phone calls. And now with this current debacle regarding error's and the cover-up... S&P had the exact same ratings that Moody's did.... so if Moody's model was wrong, shouldn't S&P's model be wrong as well? Ratings, like it or not, are supposed to reflect CREDIT RISK, not MARKET RISK... the underlying models at the time, taken into consideration historical default rates and a number of other assumptions, showed that it was a AAA rating. When the credit quality of the collateral began to deteriorate, the ratings were adjusted by both agencies, irrespective of the glitch... Hindsight, 20-20, looking back, agencies assumptions on defaults, recoveries and correlations were incorrect, but at the time, (and yes, ratings should and are forward looking) the CPDO did justify a rating of a Aaa...

Rating agencies have already taken a very large reputation and credibility hit with the ABS CDO market, and they have acknowledged their mistakes and published them for the market. They are under immense scrutiny by regulators and the market alike. But to have the entire company's integrity and credibility be called in question for a syntax error in a code of a model, is over top...

Banks paid for the risks in ABS CDOs with their balance sheets, rating agencies paid with their integrity, then again, the bonuses and fruits of securitization were mostly enjoyed by the bankers structuring CDOs... You want to talk about misaligned incentives? Lets talk about the bonus structure at banks, which clearly does not align the interest of the bankers with that of the bank (ex. UBS, Morgan, Merrill, Citi etc...) The rating agencies have been a scapegoat for too long, even though they do bear some of the blame.

Posted by guest, May 23, 2008 12:43PM

Agreed, even though there are aspects of the ratings agencies that can be cleaned up. They are tasked to assign credit risk. Systematic liquidity risk is not their job, nor have they ever staked such a claim.

Posted by guest, May 23, 2008 12:51PM

Bullshit. Everyone knew that CPDOs were a joke when they came out. There's a reason that they never gained mass acceptance like CDOS, CLOS, and other forms of ABS.

Posted by guest, May 23, 2008 12:57PM

nobody is responsible for anything, the system lost money, not me. The dog ate my homework, etc.......

losers......take some responsibility for your life

Posted by guest, May 23, 2008 1:13PM

@12:17

You don't get it do you? The problem is not the error in the code. It is the response.

Posted by guest, May 23, 2008 1:30PM

Our friend @ 12:17 is someone who misses their RA days a bit too much. Having been in structured finance group at an RA myself, it is laughable to suggest the relationship between bankers and the agencies on a given deal is anything but incestuous. Yes, group heads preach about the independent nature of their credit analysis, but working group calls usually finish up sounding like frat buddies planning out their friday night. The reason everyone's "paying in some way" is because everyone was on the same team and to suggest otherwise is asinine.

Posted by guest, May 23, 2008 2:01PM

@12:17

Just take Moody's off your resume, and then you don't have to defend it. Solves the "square peg, round hole" problem.

Posted by guest, May 24, 2008 3:13PM

Any explanation for the allegations from the FT that the response, when the error was detected (resulting in a 1.5 to 3.5 notch downgrade), was to tweak the assumptions to offset this? The FT claims to have documents that prove this. Did the ratings committee know all this? I'm interested in any scoop anyone has one way or the other.

Posted by guest, May 27, 2008 8:18AM

@12:17 is a tool

Posted by guest, May 28, 2008 5:06PM

I once called the agency to have a Moody's analyst come to my room. I wasn't pleased with her so I sent her back. They gladly sent me another one without hesitation. Bravo Moody.s.

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