image of moody's logoA former sr. analyst at Moody’s has written a letter to the SEC containing a blistering criticism of the company

((As a quick side point, Warren Buffett’s Berkshire Hathaway is  the largest shareholders in Moody’s , while David Einhorn is short the company (at least as of mid 2010). I have no position in the company.))

William J. Harrington, worked for Moody’s from 1999 until last year, when he decided to resign.

For five years, Harrington was a SVP in the derivative products group, which rubber stamped the “AAA” ratings of many products, during the boom housing years; including structured financial operating companies (SFOPs). Before that he worked on creating CDOs, CLOs, CBOs etc.

Harrington starts off by stating:

Moody’s argues that RMBS committees could not have factored the collapse of real estate prices into their opinions, given that the scale of the collapse was both unprecedented and unforeseeable. This rationale is as unconvincing as it is disingenuous, for it pretends that Moody’s and other financial players were not designing and operating the conveyances that carried real estate prices to unsustainable levels in the first place. A roller coaster inexorably chugs up to stomach-turning heights before it hurtles downward, and both a carnival operator
and a thrill seeker understand the nature of the ride’s operations.

The rationale of “who could know?” is wholly undone through even a cursory examination of the actions of Moody’s and other financial players in the structured finance sector. Moody’s and other financial players took care to protect their earning should the real estate bubble that they were ushering into the world subsequently collapse.

The main problems Harrington points out about Moody’s are as follows:

Yuri Yoshizawa, former managing director of Moody’s global structured credit, may have lied under oath to Congress.

Harrington believes that Moody’s recent attempts to reform were just PR.

Conflict of interest: “The primary conflict of interest at Moody’s is well known: The company is paid by the same “issuers” (banks and companies) whose securities it is supposed to objectively rate. This conflict pervades every aspect of Moody’s operations. It incentivizes everyone at the company, including analysts, to give Moody’s clients the ratings they want, lest the clients fire Moody’s and take their business to other ratings agencies.”

The conflict of interest topic has been discussed extensively in the media, but Harrington being a former insider, has a lot of insight and shocking facts to add to the story.

Note: I will be posting article sometime this week, about one group of people who played a huge role in causing the financial crisis and received almost no criticism.

Below is William Harrington’s full letter to the SEC in Scribd:

William Harrington Letter to SEC