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lot of people I talked with during the financial crisis thought that something seemed amiss as brokerages and credit-ratings services were issuing, what I liked to call, "happy thoughts" about the economy even though it sure seemed that we were headed over the falls in a thimble. Among the upbeat outlooks were the ratings of complex debt securities, which quickly deteriorated and led to billions of dollars of investor losses. According to The Wall Street Journal and former Moody's analyst, Eric Kolchinsky, Moody's gave high ratings to complicated debt security in 2009 with knowledge that it would downgrade assets that backed the securities.
The article includes a quote from Kolchinsky's July letter to a compliance officer at Moody's, noting that "Moody's issued an opinion which was known to be wrong." When asked about this accusation, Moody's stated that Kolchinsky "refused to cooperate with an investigation," adding that the company "takes any allegations of misconduct very seriously." That said, Moody's would not comment on the rating in question due to a review that is in progress.
We won't have to wait too long to hear the whole story, or at least Kolchinsky's side, as he is set to testify on ratings-firm reform in front of the House Committee on Oversight and Government Reform. This is not Kolchinsky's first time expressing concerns about Moody's. In September 2007 he questioned the high ratings given to new CDOs, which led to an adjustment from the company. Of course, Kolchinsky was eliminated from Moody's in October 2007, moving to the separate Moody's Analytics unit.
We all know how much weight the Street puts on these analyst ratings. The question is -- should we care so much about the ratings? This little revelation suggests that we need to worry less about what the ratings firms think about a company, and worry more about an ulterior motive to every upgrade. The SEC has taken a major step, passing rules designed to improve disclosures from ratings firms, but will this be enough?
I know that many will look at any move by brokerages and the likes with caution; of course I know many people that do this already.
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