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Former Moody's SVP charges that its analysis is "rotten to the core."

If you wonder why the term "analyst" does not automatically confer authority and reliability, read this:

The former SVP of the derivatives product division at Moody's has filed a 78-page comment about the practices of his recently-former company, charging that the analysis process is completely corrupt.

Here are some key points:
  • Moody's ratings often do not reflect its analysts' private conclusions. Instead, rating committees privately conclude that certain securities deserve certain ratings--and then vote with management to give the securities the higher ratings that issuer clients want.
  • Moody's management and "compliance" officers do everything possible to make issuer clients happy--and they view analysts who do not do the same as "troublesome." Management employs a variety of tactics to transform these troublesome analysts into "pliant corporate citizens" who have Moody's best interests at heart.
  • Moody's product managers participate in--and vote on--ratings decisions. These product managers are the same people who are directly responsible for keeping clients happy and growing Moody's business.
  • At least one senior executive lied under oath at the hearings into rating agency conduct. Another executive, who Harrington says exemplified management's emphasis on giving issuers what they wanted, skipped the hearings altogether.

I think this is going to inspire a much needed discussion about real analysis.
Your thoughts?


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I would like to see them do the same with personal credit rating agencies - my bet is each and every one of these agencies are corrupt to the core... And the same could be told of each - "follow the money"...

We obviously cannot forget what Moody's and other agencies provided as rankings prior to the housing crisis in 2008... Just sad - and they impact each and every one of us...



As a disclosure, I work for one of the personal credit rating agencies, so this may be a somehwat biased, but hopefully informed comment.  Unlike Moody's, S&P, Fitch etc.  the personal credit rating agencies only report back about information that is disclosed to them by the banks that you do business with.   For commerical credit, they report back how you (as a business) pay your trade credit as well as how you pay your loans with the bank.  Scores are created through mathematical models that are designed to provide a prediction of how (if/when) you will pay your bills. It is quite scientific and objective, but only as good as the data that is provided by the banks.  While not always accurate, it is always objective analysis.


I think the point of this article is that the large credit rating agencies (like Moody's, S&P, Ftich) use a combination of objective analysis and subjective analysis which leads them to be influenced by outside forces, such as making money and keep clients happy.  It also means that they can be pressured to change their objective analysis to be more subjective with stakeholders pressure.  While their analysis is also dependent on good data, it is more highly dependent on human analysis, which when influenced by outside forces calls into question their credibility. 


In all analysis, credibility is essential to the success of the analysis--however, in intelligence there is also analysis with the power of influence.  Which means that because the rating agencies have power and influence their analysis is accepted despite the lack of credibility.  This is a challenge that we also face in corporate competitive intelligence.  When we conduct analysis, but have no power or influence, it can be highly credible analysis, but has no impact and I don't know about you, but I have seen highly suspect analysis have significant impact because the person/group delivering it has influence and power in a company.







I'd like to address Melanie Wing's comments about the personal ratings agencies. Frankly, FICO was proven to be the Smoking Gun of the Housing/Financial crisis. Michael Lewis, the Fed, and a handful of quants at various Universities and banking institutions have studied the default rates relative to scores and the conclusion has unequivocally been that the dependency on the FICO model led to disaster. First, there are many instances where the banks that actually did more due diligence, yes, applied human intelligence and knowledge, fared far better  and had  lower default rates, than the banks that relied strictly on FICOs alone. (So much for additional subjective human intelligence being part of the problem, it actually behooved the banks that applied it) Secondly, how does one explain why borrowers with lower FICOs in many instances defaulted at lower rates than those with higher FICOs? Thirdly, how does one explain why FICO significantly overestimated the default rates of the loans in the GSE portfolios? If FICO was truly objective, I don't think this would have happened. ( Rf: St Louis FED analysis)


Further its my understanding, FICO helped S &P, Moody's develop the model(s) that they utilized to rate many RMBS securities, and we all know how that ended up.  Additionally, it seems disingenuous to assert that FICOs aren't always accurate but they're objective. I would beg to disagree as the GSE example brings into question, but as well if they arent accurate who cares if they are objective? They're useless if they are wrong, as they were proven to be in the crisis and most of the banks now acknowledge this.


Its also hard to make the case or seemingly infer that FICO and the personal credit agencies aren't also in the business to make money. Look at the explosion of personal credit monitoring services, (overlaid on the false marketing of identify theft being far higher than what it really is which FTC data blows apart)


In closing, and back to objectivity but lack of accuracy- this is hardly fair to consumers who end up paying far higher rates than they should if there are errors on the reports by the banks. In a recent study I saw, 79% of the credit reports reviewed had multiple inaccuracies. Wow. Good luck to the poor guy who tries to get them fixed-the banks can just pop something over to Equifax and viola- done! The consumer may have conclusive evidence of inaccuracies, but welcome to hell on earth to get them fixed, which does then behoove the banks doing the reporting who then get to charge higher interest rates.....





Thanks for posting this, Eric. 


The analysis about analysis (is it valid or not?) is IMO a quite large conversation about preventing and avoiding conflicts of interest.  This topic extends to laws prohibiting it, regulatory oversight, qualifications and licensing.  In my world (of law and legal services), conflicts of interests are addressed through all these measures. 


Ultimately, fixing this problem lies in recognizing that these problems arise in multi-disciplinary professional services organizations.  You either do one thing well and with integrity, or you do nothing well or with integrity. 


I look forward to hearing others' initial thoughts. 

I’m really not sure what kind of discussion can be held on this topic: Real Analysis.


Corporate Rule # 1: The good of the organization (e.g.: profit/stock price) comes first.

Corporate Rule # 2: Please see Corporate Rule # 1.

Corporate Rule # 3: Go along and get along.  David slayed Goliath NOT a corporation.  


Why on earth do you think this kind of analysis is taking place?  Yes, one could certainly argue that it is illogical for a company to do things that will lead to its ultimate public humiliation, shame or insolvency.  But to that I give you:

  • WAMU
  • BOA,
  • Lehman Brothers
  • Enron
  • Satyan Computers
  • WorldCom
  • AIG
  • Freddie Mac
  • Fannie Mae
  • Global Crossings
  • Arthur Anderson
  • Tyco International
  • Nortel
  • Reliant Energy
  • Peregrine Systems
  • Quest Communications
  • Adelphia
  • Duke Energy


What about the not so distant past of back-dating stock options? 


I’ve heard it said that the problem with Socialism is Socialism.  I could not agree more.  Eventually you run out of other people’s money to spend.  Many of the world’s large governments are on this path now.  However, the problem that remains with Capitalism is Capitalists. 


The topic here is not about analysts per say in my opinion.  It’s about the business of business and that in one word is profit.  The first cousin of profit is greed.  The latter can, does and will repurpose any analysis.   


Until ethics becomes more that a required subject in college or a Corp policy that serves more as a backstop “we believe in ethics first” than a top-down best practice, no one should be surprised at what kind of analysis may have been taking place at Moody’s.  

Steve: I think you just unlocked the way of this, in a way.

Instead of merely declaring, "Hey, we think real analysis is nifty," we can take the more assertive approach of saying: List every catastrophic failure of a company of the financial collapse and every company that has a sycophantic, dishonest approach to intelligence and you get...the same list.

I often like to cite the example of Nokia (never mind the current troubles) from back in the 1980s and 90s. The Finnish culture supports cold-eyed analysis since the people were often the victim of invading empires - they enjoyed bad news, and didn't find it threatening. This is what enabled them to see the failure of the Soviet empire in their backyard, as well as the effect it would have on Nokia, which counted 40% of its turnover from the USSR. They saw a potential disaster in advance and bet the company on cellular telephony.

Good intelligence, good analysis, world-class company. Crap intelligence, crap company.

This is a very global website (hooray!) but I want to make a commentary about the situation specifically in America.

American institutions appear to have lost the ability to perceive or enforce anything that has to do with "conflict of interest."

  • Wars of adventure are started by policymakers whose barely-former companies then immediately receive no-competition government contracts in the billions
  • Financiers leave their positions as CEO of megabanks to become Secretary of the Treasury, thus presiding over the bailouts of said banks - and not their rivals! - when things get tight
  • Ratings agencies go from being financed by those purchasing the financial instruments they assess, to the ones selling those instruments, precipitating a meltdown of the entire system
  • Congressmen retain their business holdings in the district where they are elected, then harmonize their proposed legislation with their own companies' activities

I reject the notion that humans and their institutions are inherently corrupt. It's just that this kind of thing used to look embarrassing, and now we accept it as inevitable.

In Japan - crazy I know - some leaders feel so bad when they fail their organizations, they actually jump off of buildings. In China, they open the window for you. In America? You get a book deal and a speaking tour to tell "your side of the story."

Back to analysis. I reject the notion that all analysis is supposed to be self-serving, leader-flattering bullshit. Actual analysis is supposed to be done behind closed doors so that leaders can weigh all the options before making a tough decision and launching a whole public relations campaign. If the reality of this profession is that we are expensive style gurus to the Emperors With No Clothes, then count me out, I'm going back to the world of playing bass guitar for bagpipers.

I am going to follow up the cynicism of this story with one of hope. Analysis is a noble profession. I am proud to be part of it. I am proud to know real analysts who seek truth and superior outcomes for our world's institutions. We can reject this narrative of corruption and replace it with one of honorable values.

Who's with me?




Back to analysis. I reject the notion that all analysis is supposed to be self-serving, leader-flattering bullshit. Actual analysis is supposed to be done behind closed doors so that leaders can weigh all the options before making a tough decision and launching a whole public relations campaign. If the reality of this profession is that we are expensive style gurus to the Emperors With No Clothes, then count me out, I'm going back to the world of playing bass guitar for bagpipers.


MN: Count me out too, if this is what CI has become.

Good day Eric,


 I read this article first thing this morning as I had multiple copies of it in my inbox from friends around the country. It is indeed disparaging, but ultimately highly reflective, of what's been transpiring in other analytical / critical research arenas, not just the financial sector, for quite some time. With this in mind, I would liken this Moody's expose with a piece someone posted on the board recently about the independence of many MR firms whose revenues largely come from the vendors they cover, hence why their analysts similarly are reticent to ever be truly objective, honest.

Underlying some of this from one vantage point, we've seen  a fanatical and vast expansion of PR controlling and stifling dissent, negative opinions, the truth. With that in mind, I think I responded to the MR article with an example of this in my industry. There was one rogue analyst who refused to be dictated to by the PR Machine of a Fortune 10 and he was banished from future analyst events with said firm after he questioned one of their strategies and said something perceived to be critical. Yep, instant persona non grata; and as this Sr VP at Moody's illustrates they had their own means of internal control of analysts and the truth.


Simply put, all this exemplifies the ascendancy and power of the "corporatocracy" and banking cartels --   control all messaging to their advantage, obliterate any internal controls that might indicate conflict of interest, get years of financial regs, accounting and contract law thrown out the window, control the regulators and make them lapdogs, etc all in the reckless pursuit of ever more profit.  It's way out of hand- see Matt Taibbi's latest on the SEC covering for Wall St crimes  here at


So right, what does all this mean for analysts to have the chutzpah to be nonconformist? We better join organizations that from a behavioral profile perspective relish truth telling I suppose, but as well, we need to educate about the dangers of our real opinions being marginalized...reference Financial Crisis the court docs and whistleblower testimony from many internal finance analysts who were in positions to say something about RMBS/CDOs/CDSs, and when they did, they were summarily fired....indeed, and now look at the global economy....



Does anyone wonder why there was no investigation of them for the housing meltdown and the fact that Moody's had mortgage backed securities at AAA...?


But for some reason 'now' there is going to be investigation and allegations????  [cough]


Melanie - thanks for your reply...

Regarding personal credit scores - my point was more directed to those "mathematical models" and who created, designs, tweaks, or has the interest in maintaining those models... I assume banks are heavily involved with creating rules based on those scores because of the risk associated with certain levels - for example, "everyone above 730 is considered good."

With this economy - I'd be very curious to know how those "mathematical models" will need to be adjusted since I can only assume the a "730" is no longer really a "730" - or, maybe I have now entered into why banking has been log jammed since 2008... :)
Eric, It is very important to discuss this matter. I absolutely agree with you. The problem often is not the analysts but their superiors who are changing and not accepting the products they get from the analysts. Was this not the problem with the CIA analysts  before the US invasion(most stupid decision in the history) to Iraq, who was ignored and bipassed? I tend to believe this is often not the problem of the analysts but the organizational culture of the rating companies ( and other organizations in business and in government ) which is going top down. I would like to read more about the mistakes which led to the 2008 crisis and will be grateful for relevant links.


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