Ex-Staffer Says Fear of Retaliation Means Moody's Couldn't Be Impartial on Ratings

Aug. 23, 2011 — -- The former Moody's analyst who filed blistering comments with U.S. regulators about conflicts of interest at his former employer says analysts must be shielded from retaliation if the bond ratings system is to be fixed.

William Harrington, a Moody's senior vice president in the Derivatives Group who was an employee from June 1999 until his resignation in July 2010, filed a 78-page letter with the Securities and Exchange Commission. about proposed rules for the ratings agencies.

Harrington described systematic problems within the ratings agencies that can lead to conflicts of interest and flawed ratings reports. Harrington seems to confirm the familiar concern that Moody's is being paid by the companies whose securities it rates and therefore has their best interests at heart.

The major ratings agencies Moody's and Standard & Poor's have come under fire for their role in assigning top ratings to bundles of mortgage securities that went delinquent, leading to the financial meltdown that began in 2008.

Harrington said analysts were intimidated or harassed, and dissenting analysis was not properly weighed in final decisions. "Putting up a spirited effort before caving-in made analysts look good in the eyes of management. Opposing a banker or issuer brought only trouble from Moody's senior management," Harrington wrote.

He wrote that "bankers and issuers were willing to have as many calls a day as were necessary to wear a rating team down."

Formal feedback in his annual reviews as an analyst centered on "the recurring themes" that he "should make life easier for bankers and issuers and that he should be more alert to the bottom line."

Over 55 comments have been submitted after the SEC. announced the beginning of the public comment period in May.

An agency spokesman said the commission is beginning to sort through the comments and may not begin further steps until January to June next year.

In response to the Harrington's letter, Moody's issued a statement:

"We cannot emphasize strongly enough the importance Moody's places on the quality of our ratings and the integrity of our ratings process. For that very reason, we have robust protections in place to separate the commercial and analytical aspects of our business."