Moody's: The Arthur Anderson of Credit and Real Estate
I'm writing this blog about Moody's Corp. I'm going to go by a bit of personal history, and try to influence you, the reader, and hopefully the Fool.com community at large.
The first time I ever heard about Moody's was in an old fool.com article. It has been updated time and again, but here is a link to the article as it appeared just last September (9/13/2007; writer: Paul Elliott):
Here is the quote that stands out:
'A while back, I asked Motley Fool co-founder Tom Gardner for the one stock I should buy for my IRA. "I love Moody's," Tom replied, "but it's a little pricey at these levels." I bought it that instant. (Moody's is also off its recent highs, but it's still up more than 70% since I bought.)'
Since reading that article, I have seen Moody's mentioned, time and again, in many many fool.com articles, oftentimes linking it with Buffett.
Frankly, I am disgusted by this.
Mr. Elliott makes the assertion that Moody's is a great company. Let's look at some facts, shall we?
"An analyst in a group that rated collateralized debt obligations was moved off an investment bank’s deals after bankers requested an analyst who raised fewer questions about their deals, the newspaper said.
Moody’s also moved another investment banking official to its surveillance unit, which monitors the performance of deals already rated, after an official agreed with an investment banker’s opinion that the analyst was too fussy, the newspaper added...
Moody’s, S&P and Fitch are paid by issuers for the securities they rate, and critics regularly question the conflict of interest they say this arrangement poses for the rating agencies."
My Comment: This is classicly reminiscent of the shady accounting practices of Enron, and the policies of Arthur Anderson, when accountants with either Enron or Anderson would bring up irregularities, they were shuffled off to other projects or otherwise silenced. The difference is instead of one multibillion dollar company, Moody's is responsible for rating trillions of bonds and debt instruments. This is potentially much more far-reaching and destructive.
"Moody’s awarded incorrect triple-A ratings to billions of dollars worth of a type of complex debt product due to a bug in its computer models, a Financial Times investigation has discovered.
Internal Moody’s documents seen by the FT show that some senior staff within the credit agency knew early in 2007 that products rated the previous year had received top-notch triple A ratings and that, after a computer coding error was corrected, their ratings should have been up to four notches lower....
On discovering the error early in 2007, Moody’s corrected the coding glitch and instituted methodology changes. One document seen by the FT says “the impact of our code issue after those improvements in the model is then reduced”. The products remained triple A until January this year when, amid general market declines, they were downgraded several notches."
My Comment: The implication here is clear: Moody's was covering their butts, changed the software so they wouldn't have to report these faulty ratings, and then did the close your eyes and ears and go "nyah nyah nyah nyah nyah I can't hear you" to those of us who have been blogging and reporting about the illogical nature of these ratings, and prayed that the economy would recover so that the debt would hold value. When they didn't, the bury-your-head-in-the-sand-and-shred-your-documents tactic was no longer viable, they were forced to report this and now you've seen the recent selloff. Actions like this are criminal - this is a deliberate fraud against debt consumers. I will not personally be happy unless and until the management of Moody's are led away by the FBI in handcuffs and prosecuted to the fullest extent of the law.
"The two biggest credit rating agencies denied that they gave inflated ratings to sub-prime mortgage debt and other discredited bonds in order to attract more lucrative business from Wall Street banks..
Senator Jim Bunning, a Republican from Kentucky, described the process as "like a movie studio paying a critic to review a movie and then using a quote from his review in the commercials". A Democrat, Robert Menendez, said the agencies were "playing both coach and referee".
But Vickie Tillman of Standard & Poor's credit market services said that the agencies took every care to try to ensure accurate ratings, and that no analyst was ever paid according to the amount of business he or she generated, or the types of ratings given."
My Comment: Senator Bunning is right on the mark. Mish also talks about "shopping around" debt to whomever would rate it the highest, which was also blatantly occurring, especially in conjuction with mortgage insurers. We can see how well that has worked out for the mortgage insurers. When a company or organization does something that is so obviously flawed that everyone can see it, but it benefits their own self-interest, we have but 2 choices to think of when considering the root cause of the action: 1. The individual(s) or company are incompetent, or 2. The individual(s) or company are dishonest. My contention is that you do not build a multi-billion dollar enterprise by being incompetent, which leaves only one other option. Unfortunately, ethics, integrity, and honesty oftentimes can be easily thrown out the window for a quick buck, and the evidence I am presenting here should make it clear that Moody's made clear and intentional choices in how to operate their business.
While I don't like to depend on other blogs, Mish's blog post Time to Break Up the Ratings Cartel outlines many of these crimes that all ratings agencies have committed against it's customers. And who are it's customers?
"A pension fund sued Moody's on Wednesday, alleging the credit-ratings agency misrepresented or failed to disclose that it had assigned "excessively high ratings to bonds backed by risky subprime mortgages."
In the suit filed yesterday in U. S. District Court in Manhattan, the Teamsters Local 282 Pension Trust Fund says Moody's compromised subprime home loans, including bonds packaged as collateralized debt obligations, by assigning them such ratings...
The Securities and Exchange Commission is examining the accounting and disclosure issues to see if the credit-rating agencies followed proper protocol in rating the mortgage-backed securities, the SEC chairman, Christopher Cox, told a Senate committee yesterday."
My Comment: While the lawsuit was a shareholder lawsuit, the clear fact remains that Moody's intentionally inflated ratings has done significant damage to the credit and equities markets, and the current SEC investigation is the smoke that is signifying a significant fire, a fire fueled by greed, unethical behavior, and outright fraud. I have no faith that the SEC will find anything of significance as the SEC has it's own issues; my preference would be for the FBI to raid Moody's and have their forensic accountants and computer analysts take a look at Moody's business practices.
Now, after all this information, I wonder if Mr. Elliott and Tom Gardner still believe that Moody's is a "great company." Based on the bullish slant that Moody's continues to get in all the fool.com mentions in conjunction with Buffett and Berkshire, I can only assume the answer is yes. I have also posted replies to David Gardner's bull pitch on the Moody's CAPS page, and my pitches there have not been answered as of yet.
My contention is that Moody's is not only as bad as Arthur Anderson, they are in fact the worst perpetrators of the ratings fraud that has been part-in-parcel of the worlds biggest real estate bubble ever, and consequently will be a major factor in the current and coming severe downturns. Furthermore, I will not be satisfied until the executives of Moody's are arrested and prosecuted to the fullest extent of the law. While I do not expect most of fooldom to be as strong in their opinions of this as I am, I would love to see eveyrone's opinions, and to have people talking about this more.
Moody's made millions upon millions of dollars based on clearly fraudulent activity. They are receiving their comeuppance, and I would not be surprised to see their stock price take further hits as more evidence is uncovered.