Ex-Moody’s Analyst: Ratings System Was Broken by 2006

“William J. Harrington was a senior analyst at the rating agency Moody’s between 1999 and 2010 in New York. Since then he has been campaigning for reform and drawing attention to ongoing problems with ratings. Bill is coming into the comment threads here to answer your questions and discuss his views.

“The rating agencies have been the all-purpose bogeymen for the crisis. They bear a heavy responsibility, absolutely, but this exclusive focus obscures how the problems are embedded in the whole system: the big banks, accountancy firms, financial law firms, investment firms, regulators, the financial press. The rating agencies have done us a disservice by allowing so much of the blame to rest on them. They are effectively protecting these other players – who seem quite happy with this arrangement. Meanwhile, people at rating agencies say: ‘Just blame us, we’re used to it.’

“The rating agencies are such small entities in such a huge industry. They are like the Panama canal. Crucial but very small. Worldwide the nine big registered rating agencies have less than 4,000 junior and senior analysts working for them, combined across all activities. JP Morgan alone employs a quarter of a million people. Again, this state of affairs seems to suit the big players well. The rating agencies are one moving piece in the machine that they can push around.

“An added problem is that rating agencies form an oligopoly, with Moody’s, Fitch and S&P [Standard and Poor’s] controlling 97% of the market between them. If there were many significant rating agencies of varying sizes and ownership structures rather than three indistinguishable large ones, then if a few changed their approach it would be hard for the rest to simply continue to go along for the ride. Currently, this is not a self-correcting system.

“The CEO of Moody’s in the run-up to the fiasco in 2008 is now … still the CEO of Moody’s. Last year his compensation was $6m, in line with his five-year average. Rating agencies make so much money … Moody’s has never had a losing quarter. This is why analysts who follow Moody’s for investors really like Moody’s. Moody’s always makes a profit…”

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