Page 236 - untitled

THE MADNESS 

Berkshire Hathaway held  of the company. After share repurchases by Moody’s
Corporation, Berkshire Hathaway’s holdings of outstanding shares increased to over
 by . As of , Berkshire Hathaway and three other investors owned a com-
bined . of Moody’s. When asked whether he was satisfied with the internal con-
trols at Moody’s, Buffett responded to the FCIC that he knew nothing about the
management of Moody’s. “I had no idea. I’d never been at Moody’s, I don’t know where
they are located.”  Buffett said that he invested in the company because the rating
agency business was “a natural duopoly,” which gave it “incredible” pricing power—
and “the single-most important decision in evaluating a business is pricing power.” 
Many former employees said that after the public listing, the company culture
changed—it went “from [a culture] resembling a university academic department to
one which values revenues at all costs,” according to Eric Kolchinsky, a former man-
aging director.  Employees also identified a new focus on market share directed by
former president of Moody’s Investors Service Brian Clarkson. Clarkson had joined
Moody’s in  as a senior analyst in the residential mortgage group, and after suc-
cessive promotions he became co-chief operating officer of the rating agency in ,
and then president in August .  Gary Witt, a former team managing director
covering U.S. derivatives, described the cultural transformation under Clarkson: “My
kind of working hypothesis was that [former chairman and CEO] John Rutherford
was thinking, ‘I want to remake the culture of this company to increase profitability
dramatically [after Moody’s became an independent corporation],’ and that he made
personnel decisions to make that happen, and he was successful in that regard. And
that was why Brian Clarkson’s rise was so meteoric: . . . he was the enforcer who could
change the culture to have more focus on market share.”  The former managing di-
rector Jerome Fons, who was responsible for assembling an internal history of
Moody’s, agreed: “The main problem was . . . that the firm became so focused, partic-
ularly the structured area, on revenues, on market share, and the ambitions of Brian
Clarkson, that they willingly looked the other way, traded the firm’s reputation for
short-term profits.” 
Moody’s Corporation Chairman and CEO Raymond McDaniel did not agree with
this assessment, telling the FCIC that he didn’t see “any particular difference in cul-
ture” after the spin-off.  Clarkson also disputed this version of events, explaining
that market share was important to Moody’s well before it was an independent com-
pany. “[The idea that before Moody’s] was spun off from Dun & Bradstreet, it was a
sort of sleepy, academic kind of company that was in an ivory tower . . . isn’t the case,
you know,” he explained. “I think [the ivory tower] was really a misnomer. I think
that Moody’s has always been focused on business.” 
Clarkson and McDaniel also adamantly disagreed with the perception that con-
cerns about market share trumped ratings quality. Clarkson told the FCIC that it was
fine for Moody’s to lose transactions if it was for the “right reasons”: “If it was an analyt-
ical reason or it was a credit reason, there’s not a lot you can do about that. But if you’re
losing a deal because you’re not communicating, you’re not being transparent, you’re
not picking up the phone, that could be problematic.”  McDaniel cited unforeseen
market conditions as the reason that the models did not accurately predict the credit