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."

The goal of management, Harrington wrote, "is to mold analysts into pliable corporate citizens who cast their committee votes in line with the unchanging corporate credo of maximizing earnings of the largely captive franchise."

He wrote that the management and the board "are squarely responsible for the poor quality of previous Moody's opinions that ushered in the financial crisis and should not be given first shot at debasing future opinions as well. Seriously, dudes, not for nothing, but something is way wrong with this picture. The phrase 'bass ackwards' recurs. Please re-calibrate."

Harrington asks why analysts would want to work at Moody's given the possibly troubled internal reporting process within the company.

He answers that that "analysts once came to Moody's solely to do work of which they would be proud, not to kowtow to their superiors and certainly not to prostrate themselves in front of whichever external entity happened to be footing the bill on a given day."

The former employee wrote that "analysts will be eager to police the 'credit rating process' effectively if they are given incentives to do so and if they are protected from retaliation by Moody's management for having done so."

In response to a request for comment, Harrington said his "comment stands on its own. I don't want to get in its way," in an email to ABC News.

Harrington did comment on an online story Monday night.

A CNBC story stated Harrington "blinks in the face of the anti-authority implications of his argument. He doesn't want to embrace a fully antiauthoritarian point of view. Instead, he just calls for better regulators."

In response, Harrington wrote "I have not blinked from accepting the implications of my actions nor the path where my ideas may lead."

"My colleagues and I worked for 11 years to make Moody's committees work in form and in spirit. I have standing to discuss the internal fixes that will help replicate our successes," Harrington wrote.