September 30th, 2009
Live Blogging on House Oversight Committee hearing of Credit Rating Agencies.
We will be live blogging the House Oversight Committee hearing on the role of Credit Rating Agencies in a future financial crisis.
Please check back for updates starting 10 a.m. EST
Introductory remarks bu Mr. Issa going on justifying why this committee and not financial services committee is looking at the role of credit rating agencies.
Participants Mr. Ilya Eric Kolchinsky- Former Managing Director Moody's Mr. Scott McCleskey- Former Senior Vice President for Compliance Moody's Mr. Richard Cantor- CRO Moody's
Mr. Ilya Eric Kolchinsky- Moody's values revenue generation over quality ratings, credit policy group is short staffed and bullied, inadequate methodologies, rating models put together in haphazard group, compliance group lacks independence. Same CDO's that caused huge financial crisis still being rated. simple solution: rating industry should be regulated like accounting industry. THey should have a single set of standards like the accounting industry has in terms of the Generally Accepted Accounting Principles.
Mr. Scott McCleskey- Compliance function lacks independence completely. Concerns- experienced compliance officers were pushed out and structured finance analysts were brought in with zero compliance experience. There were inshort passing judgement on their own previous analyzed products. He was sidelined and excluded from any compliance investigations. He was replaced with a structured finance expert who had rated mortgage backed securities. Recommends that compliance reports directly to CEO.
Mr. Richard Cantor: Different rating analysts have different views of the same credit product. Moody's supports a number of reform measures. Addressing Mr.Kochinsky's claims, are unsupported.
Kochinsky: Moody violated Securities law by issuing ratings that they knew was wrong. New methodology for CDO's was not realistic and problematic and not based on real world problems, Informed compliance and risk group.
McCleskey- Municipal Securities may not have updated ratings. Has concerns around this. He raised this issue and asked SEC to raise this issue as well.
Mr. Richard Cantor: Moody's favors multiple credit rating agencies. Strongly support enhanced securities disclosures.
McCleskey- There is a distinction between transparency and disclosures. Should SEC have more authority? SEC has not done their basic cyclical duties but would not write them off just yet. Kochinsky has similar views.
Kanjorski feels that the whistleblowers have not reported gross negligence or a huge issue. Seems to be a situation where a colleague was not invited to a meeting and is now disgruntled.
Kochinsky: Rule 10b5 has been violated by Moody's. Reported to the compliance group, the SEC and to the House Committee. Conflict of Interest is a big issue with credit rating agencies. The conflict is present when issuer pays for rating of their own product.
Should SEC set up minimum set of documents that issuers should provide rating agencies for review?
Kochinsky- Yes McCleskey- Yes. But should not set minimum standards because people will only meet such minimum. Cantor- Was confused initially with the question finally answered yes.
Q to Kochinsky and McCleskey: Why did this happen at Moody's?
Kochinsky: There is not incentive not to. Did it for revenue.Ratin Agencies are large firms with large fixed costs. If they say no to rate some products, issuers will go to some other rating agency. Issuer can also select any rating agency that they think will help them out. McClesky: first, senior mgt of structured finance group was very proud of the revenues they brought in. second incentives are huge. take a look at performance evaluation or regarding collusion between agencies, not aware of any.
Kochinsky:Rating agencies control their rating methodologies completely. Is not subject to any review or control or standards.
Cantor: Subprime or low rated collaterals are now scrutinized closely. McCleskey:Municipal Securities are not reviewed frequently.
Did moody's succeed or fail at its task? How does it "rate" itself? Cantor: Not a high grade. How many employees do you have now versus a few years back? Cantor: Added employees. His area has doubled from 25 to 50. Key part is to improve rating process and policies.
Did Moody's retaliate against Kochinsky? Cantor: Not familiar with personnel decisions. DId moody's accept subsequently kochinsky's policy recommendation? Cantor: Yes.
Did Sec get in touch with you about your complaint? Kochinsky: Yes...Last week (only after this hearing was announced)
Committee member Mr.Foster feels rating industry should be regulated by an oversight board like the PCAOB. Kochinsky and McClesky: Agree Cantor: SEC already does this.
Investigation of outside counsel will not result in a written report. Committee member Mr.Connoly wants to know why a written report has not been issued.
According to McClesky, his termination from Moody's was nothing to do with his "whistle blowing". In fact according to McClesky he did not whistleblow.
All 3 were asked to state their qualifications. 12.30p.m. Mr Kochinsky- No standard process of review rating models during the credit crisis. Alignment of incentives across the board should resolve most of the mortgage mess. Closing statement End.
Tags: House Oversight Committee hearing, Moody's
