Sunday, August 21, 2011

Analyst Blows Whistle on Moody's Rating System

Posted by: Noël Jones

This article by Henry Blodget of Business Insider on line, a former Senior Vice President at Moody's has blown the whistle on the rating agency's irresponsible practices with regard to rating financial products that eventually led to the crash of our economy.

William J. Harrington, an employee of Moody's for 11 years, starting in 1999, worked his way up the ranks of the derivative products group, until his resignation last year.The main problem, according to Harrington, is the obvious conflict of interest between the honest rating the risk on financial products that are being  issued by the same big banks that are paying the agency to rate them. Harrington was one of the engineers of the Collateralized Debt Obligation (CDO), and was part of the team during the final crescendo of the housing bubble. Here's how it worked:

Someone with not-so-hot credit or no credit at all is given a mortgage to buy a house. But that bank knows that the chances of that homeowner paying everything off is risky, so it sells the mortgage to a another bank, who buys insurance from AIG, and then sends the new "product" (the bad loan + insurance) to Moody's to get it ranked as a less risky investment, and then they sell it at a higher price (because it's "less risky" now) to another bank to make a profit. If Moody's doesn't give them the rating they want, so that they can make a big profit on the bad loan, then they will just threaten to take all their business to Moody's competitor, Standard and Poor's (who undoubtedly has the same conflict of interest going on). Moody's doesn't want to lose the business, so they give them the rating they want, and it goes on and on until everybody finally starts defaulting on their mortgages and someone gets caught holding the bag. Only what happened in our case, was that our government declared these banks "too big to fail" and bailed them and AIG out, at full price, with our tax dollars.

Four things of note here:

1. This should be ALL OVER the media, but I haven't heard a peep about it yet on the cable new networks.
2. These dirty practices took place with the blessings of the Bush Administration
3. The bailout took place under the Obama Administration
4. According to this article none of the reforms currently proposed do anything to stop the practice of faulty ratings

This is not a partisan issue. Washington is so completely bought-off by the banking industry, (please see the documentary Inside Job) that they are willfully aiding in the steady extraction of wealth from the middle and lower classes, via predatory practices and dishonest trading.


Ralph said...


The author of this article, Henry Blodget, lost his securities license due to his misleading reporting of stocks during the late 1990's. Remember PETS.COM? This is one of several stocks Blodget reported to be the second coming of Christ. If you owned it and listened to Blodget, you lost it all.

While I doubt Moody's or S&P are blameless, you need to consider the source. He is far from being an objective news source.

noel jones said...

Ralph--I felt that because William J. Harrington's 80 page letter to federal regulators was included, that that was getting it straight from the source.

Do you feel that The Washington Post is credible? They are reporting the same story:

Dennis R. Lieb said...


Blodget makes no bones about his professional past. It's part of his bio at the Business Insider website (in pretty good detail at that). Considering he was nailed by Eliott Spitzer during Spitzer's term as NY State Attorney General, who was in turn nailed by the Feds for soliciting prostitution and had to resign the governorship...AND that the federal wiretap on Spitzer was probably a result of payback by the Bush administration for Spitzer's determination in having a coalition of state's attorney generals go after the predatory lenders despite the Federal Office of Thrift Supervision's refusal to do so on their own (years before the housing crash), I would think we need to be a little less naive about our information sources.

The financial industry - as it is allowed to run in this country - has no good guys. Its catch-as-catch-can. On the topic of catching things; if anyone was really serious about breaking open the Wall Street fraud mess and seeing people go to jail, the prostitution angle is the back door to quick success. This activity is rampant on Wall Street and if you picked the right patsies at the bottom of the food chain they would sell out their insider, financial scamming bosses in a minute to stay out of jail. You'd have a line-up of the top guys in every firm in America.

Then we'd see some heads roll.


noel jones said...

Having worked in the industry as an executive admin, I can attest to what Dennis is saying--carrying on with expensive international prostitutes is, unfortunately, quite common. And the prostitution houses are very helpful in covering up for their clients in that when you swipe your credit card, all that show up is the name of a marketing research company...

noel jones said...

and many of them are married...they are sociopaths--no conscious at all about what they do to their wives, or what they do to families all across America that are now struggling as a result of their greed driving our economy over the edge.

Anonymous said...

To anyone daring to take the time to read Mr. Harrington's words in his 78 page comment to the SEC, providing they have (at least) the reading acuity of a 5th grader, it becomes painfully obvious why Mr. Harrington was fired. His comments read like a desperate inferiority complexed little man deeply confused about his sexuality and little, to no, professional subject matter expertise.

The patience of Mother Teresa would surrender and sh*t can it after 2 sentences. One is reminded of an under achiever's term paper: A multisyllabic, repetitively overly ornamented and overly garnished study of shriveled pointlessness (see what I mean!).

The reason he became a "team leader", as most in corporate environments would atest, is that he could not do the work. He is a talker not a doer. He is, by any definition, an overly credentialed master of the art of delegation and, in his mind, a victim of those who lack the wisdom to see his true value.

Moody's problem is not so much the hoping to be Lame Stream CSPAN media queen Harrington's thin rhetoric. Moody's problem is why did they hire that creampie in the first place!

noel jones said...

"me thinks the lady doth protest too much..."

that's a pretty passionate attack on Harrington--it sounds personal--do you know him?

Dennis R. Lieb said...


I repeat; there are no good guys.

One rat turning on another. We really need to see the whole thing collapse before we can start from scratch with new rules. The bums in charge now will never fix it on their own. Batten down the hatches and prepare for a shit storm.