Saturday, August 20, 2011

Regulatory Capture... a well-known phenomenon.

A former senior analyst at Moody's has gone public with his story of
how one of the country's most important rating agencies is corrupted
to the core.

The analyst, William J. Harrington, worked for Moody's for 11 years,
from 1999 until his resignation last year.

From 2006 to 2010, Harrington was a Senior Vice President in the
derivative products group, which was responsible for producing many of
the disastrous ratings Moody's issued during the housing bubble.

Harrington has made his story public in the form of a 78-page
"comment" to the SEC's proposed rules about rating agency reform,
which he submitted to the agency on August 8th. The comment is a
scathing indictment of Moody's processes, conflicts of interests, and
management, and it will likely make Harrington a star witness at any
future litigation or hearings on this topic.

The primary conflict of interest at Moody's is well known: The company
is paid by the same "issuers" (banks and companies) whose securities
it is supposed to objectively rate. This conflict pervades every
aspect of Moody's operations, Harrington says. It incentivizes
everyone at the company, including analysts, to give Moody's clients
the ratings they want, lest the clients fire Moody's and take their
business to other ratings agencies.

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