Investors depend on ratings sercvices to give them timely warning if a stock or bond isn't really worth the price being asked for it. The biggest and most prestigious bond-rating service in the country is (or was before last year's revelations) Moody's. Prior to, say, the Enron fiasco, most people who knew the matkets would have insisted that Moody's was incorruptible and all but infallible when they rated stocks and bonds, that whatever Moody's had to say about an investment was the Gold Standard. I myself have heard that from corporate executives and investors for well nigh onto 40 years now. In the community it was easier to believe that Jack Welch boiled babies for lunch than that Moody's could make a mistake, never mind be bought like any other corrupt corporate shill. It was unthinkable.
Even after Enron, Moody's managed to avoid most of the blowback. They pleaded ignorance when their support of Enron turned out to be based on a dream Kenny Lay had one night, insisting that Enron had fooled everybody, them included, and that they were as much a victim as the rest of Wall Street.
In the light of what a McClatchy investigation has been turning up, we may have to re-visit that contention. Moody's was hip-deep in a conspiracy to hide the size and vulnerability of the risks the Big Banks were taking in the Bush Era, and there can be little doubt at this point that their "ignorance" was the result of a deliberately staged deniability.
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."
There was nothing "accidental" about that arrangement. Obviously the high muckety-mucks at Moody's had sold their souls to the toxic mortgage lenders and were clearing their floor of anyone who dared to question the risks they were taking. But they went even further. McClatchy reports today that Moody's high command disbanded the risk assessment committee that was supposed to advise its own BOD.
Moody's blue-ribbon board of directors stopped receiving key information from an internal committee that was supposed to keep the board informed of risks to the company, a McClatchy investigation has found.
Instead, the ad hoc risk-management committee suddenly disappeared, precisely at the time when the board and management should have been shifting to higher alert as the financial world began quaking.
As McClatchy reported last year, the credit-rating agency had been handing out Triple-A grades like candy for Wall Street mortgage securities that were backed by pools of home loans that turned out to be junk.
The loss of an important watchdog might have made a significant difference in Moody's conclusions and warnings might have gone out much earlier than they did. If, of course, Moody's BOD had cared. Apparently they didn't.
"My question the whole time has been, 'Where the hell has the board been?'" said a former Moody's employee who was on the disbanded committee. The employee spoke on the condition of anonymity at the advice of a lawyer, fearing future litigation. "I would have expected, sitting where I was, that I would have got a lot more calls from the board. I got none of that."
Several former Moody's executives who made presentations to its board as the financial crisis emerged in 2006 and 2007 described the board members as incurious, saying they seemed to be there primarily to enjoy the perks and prestige of board membership. The former executives all demanded anonymity on the advice of their lawyers.
Moody's board members receive $75,000, $95,000 or $115,000 a year for the six or eight meetings they attend, depending on whether they hold leadership positions, plus $115,002 every year in annual restricted stock.
(emphasis added)
The assessment committee may have been disbanded, at least in part, because the BOD had no interest in anything negative it might find out and in any case didn't want to listen to anything except positive booster cheerleading that said everything was for the best in the best of all possible worlds, etc.
That may be why Moody's executives got away with disbanding the committee but that disbanding also suggests very strongly that there was an active conspiracy in effect to hide the mortgage scam from both the public and investors. The Board could plead "ignorance" because the only committee charged with the responsibility for telling them what was going on no longer existed. It no longer existed because Moody's executive board had gotten rid of those negative nosy parkers.
Does anyone out there know why this isn't being treated as a scandal?
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