Sonntag, Mai 09, 2010

The Slow Wheels Of Justice...

One of the problems facing the financial community is that folks who screw up spectacularly aren't taken out of commission fast enough. Due process of law is not something to be ignored, but this is ridiculous.

Let's take a step back into time: Moody's Investors Services (MIS) made an astonishing, severe and entirely avoidable mistake in their rating procedures, despite rating committees and oversight. We're not talking a slight error, but rather a severe one, one that fundamentally compromises the rating quality (and rating quality is everything).

What happens? A "woops, our bad" and that's it?

Well, not quite (you have to scroll down to find this, but it is there...):

On July 1, 2008, Moody's publicly announced the results of the Company's investigation into the issues raised in a May 21, 2008 newspaper report concerning a coding error in a model used in the rating process for certain constant-proportion debt obligations. The Company's investigation determined that, in April 2007, members of a European rating surveillance committee engaged in conduct contrary to Moody's Code of Professional Conduct. On March 18, 2010, MIS received a "Wells Notice" from the Staff of the SEC stating that the Staff is considering recommending that the Commission institute administrative and cease-and-desist proceedings against MIS in connection with MIS's initial June 2007 application on SEC Form NRSRO to register as a nationally recognized statistical rating organization under the Credit Rating Agency Reform Act of 2006. That application, which is publicly available on the Regulatory Affairs page of, included a description of MIS's procedures and principles for determining credit ratings. The Staff has informed Moody's that the recommendation it is considering is based on the theory that MIS's description of its procedures and principles were rendered false and misleading as of the time the application was filed with the SEC in light of the Company's finding that a rating committee policy had been violated. MIS disagrees with the Staff that the violation of a company policy by a company employee renders the policy itself false and misleading and has submitted a response to the Wells Notice explaining why its initial application was accurate and why it believes an enforcement action is unwarranted.

 Cease and desist here means that Moody's may no longer calculate ratings and that the registration as a nationally recognized statistical rating organization may be removed. If so, end of story for Moody's: the SEC is finally actually doing something that it was intended to do, rather than willfully ignore ponzi schemes (Madoff) and other egregious breaches of securities law.

The shame of it all is that it took this long to get that far. Of course, Moody's says it was all the fault of those damned European weenies and we're completely and totally innocent.

Right. Believe that, and I have a great deal on a bridge...

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