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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
explained that “Moody’s has erected safeguards to keep teams from too easily solv-
ing the market share problem by lowering standards.” But he observed that these
protections were far from fail-safe, as he detailed in two area. First, “Ratings are as-
signed by committee, not individuals. (However, entire committees, entire depart-
ments, are susceptible to market share objectives).” Second, “Methodologies &
criteria are published and thus put boundaries on rating committee discretion.
(However, there is usually plenty of latitude within those boundaries to register
market influence.)”
Moreover, the pressure for market share, combined with complacency, may have
deterred Moody’s from creating new models or updating its assumptions, as Kimball
wrote: “Organizations often interpret past successes as evidencing their competence
and the adequacy of their procedures rather than a run of good luck. . . . [O]ur
years of success rating RMBS [residential mortgage–backed securities] may have in-
duced managers to merely fine-tune the existing system—to make it more efficient,
more profitable, cheaper, more versatile. Fine-tuning rarely raises the probability of
success; in fact, it often makes success less certain.”
If an issuer didn’t like a Moody’s rating on a particular deal, it might get a better
rating from another ratings agency. The agencies were compensated only for rated
deals—in effect, only for the deals for which their ratings were accepted by the issuer.
So the pressure came from two directions: in-house insistence on increasing market
share and direct demands from the issuers and investment bankers, who pushed for
better ratings with fewer conditions.
Richard Michalek, a former Moody’s vice president and senior credit officer, testi-
fied to the FCIC, “The threat of losing business to a competitor, even if not realized,
absolutely tilted the balance away from an independent arbiter of risk towards a cap-
tive facilitator of risk transfer.” Witt agreed. When asked if the investment banks
frequently threatened to withdraw their business if they didn’t get their desired rat-
ing, Witt replied, “Oh God, are you kidding? All the time. I mean, that’s routine. I
mean, they would threaten you all of the time. . . . It’s like, ‘Well, next time, we’re just
going to go with Fitch and S&P.’” Clarkson affirmed that “it wouldn’t surprise me to
hear people say that” about issuer pressure on Moody’s employees.
Former managing director Fons suggested that Moody’s was complaisant when it
should have been principled: “[Moody’s] knew that they were being bullied into cav-
ing in to bank pressure from the investment banks and originators of these things. . . .
Moody’s allow[ed] itself to be bullied. And, you know, they willingly played the
game. . . . They could have stood up and said, ‘I’m sorry, this is not—we’re not going
to sign off on this. We’re going to protect investors. We’re going to stop—you know,
we’re going to try to protect our reputation. We’re not going to rate these CDOs, we’re
not going to rate these subprime RMBS.’”
Kimball elaborated further in his October memorandum:
Ideally, competition would be primarily on the basis of ratings quality,
with a second component of price and a third component of service.
