Moody's Makes It's Excuses to Congress

Moody’s (MCO) made the requisite trip to Congress for the requisite spanking and reprimands. Michael Kanef Group Managing Director testified in front of the US Senate Committee on Banking, Housing Urban Affairs.

Moody’s is saying that they cannot smell the financial BS that issuers and interested parties can serve up. They are also saying that unless people stop lying to them they will continue to be unable to identify the terrible odour of BS.

The role of rating agencies will be debated for a long time. But if Moody’s feels that they have been lied to and have been unwittingly forced to rely on fraudulent representations then they should start some lawsuits. If they do not start to sue then they must think the representations were OK so why propose changes. Follow the quotes and see if you can spot the hypocrisy.

Very early in his prepared remarks he made the following comment:

“Moody’s has always been clear and consistent in telling the market that our ratings should not be used for any purpose other than as a gauge of default probability and expected credit loss. We have discouraged market participants from using our ratings as indicators of price, as measures of liquidity, or as recommendations to buy or sell securities. “

He then went on to say

“It is important to note that, in the course of rating a transaction, we do not see individual loan files or information identifying borrowers or specific properties. Rather, we receive only the aforementioned credit characteristics provided by the originator or the investment bank. The originators of the loans and underwriters of the securities also make representations and warranties to the trust for the benefit of investors in every transaction. While these representations and warranties will vary somewhat from transaction to transaction, they typically stipulate that, prior to the closing date, all requirements of federal, state or local laws regarding the origination of the loans have been satisfied, including those requirements relating to: usury, truth in lending, real estate settlement procedures, predatory and abusive lending, consumer credit protection, equal credit opportunity, and fair housing or disclosure. It should be noted that the accuracy of information disclosed by originators and underwriters in connection with each transaction is subject to federal securities laws and regulations requiring accurate disclosure. Underwriters, as well as legal advisers and accountants who participate in that disclosure, may be subject to civil and criminal penalties in the event of misrepresentations. Consequently, Moody’s has historically relied on these representations and warranties and we would not rate a security unless the originator or the investment bank had made representations and warranties such as those discussed above.”

On the very same day Moody’s issues a press release that starts with the paragraph

“Moody's Investors Service is proposing a series of enhancements aimed at bringing greater transparency to the securitization process for non-prime residential mortgage-backed securities (RMBS). The proposed changes include third-party oversight of the accuracy of loan information and making loan-level performance information available to transaction participants. In addition, Moody's proposes that issuers provide stronger and more uniform representations and warranties to investors regarding loan information, and that a third party be responsible for monitoring and enforcing the representations and warranties. These proposals reflect conversations Moody’s has had with market participants, industry trade organizations and oversight authorities.”

Moody’s web site continues to state

“Moody's Investors Service is among the world’s most respected and widely utilized sources for credit ratings, research and risk analysis. Moody’s commitment and expertise contribute to stable, transparent and integrated financial markets, protecting the integrity of credit.”

Moody’s wants to stay up in the stratosphere above the fray. It is clear that when it comes to structured financings Moody’s has allowed themselves to be outwitted to the point where the very nature of credit ratings for structured deals has been rendered useless.