Eric Kolchinsky, Moody's Whistleblower: Ratings Are Still Inflated, Nothing's Changed

11/23/2009 04:12 am ET | Updated May 25, 2011

As the big three credit rating agencies -- Moody's Investor Service, Standard & Poor's and Fitch Ratings -- prepare to face the scrutiny of the House Committee on Oversight and Government Reform on Thursday, one whistleblower has stepped forward with shocking new allegations about the agencies' lack of reform.

As the Wall Street Journal reports today, former Moody's analyst Eric Kolchinsky is prepared to testify that Moody's is continuing to issue artificially high ratings for Wall Street's controversial debt securities. Though the SEC recently proposed new rules for credit rating agencies, there is growing concern among many that the reforms don't go far enough.

During the financial crisis, credit rating agencies were notorious for slapping AAA ratings on shoddy Wall Street assets, including those issued by AIG - and were blamed by many for helping to fuel last year's economic meltdown. Kolchinsky told the WSJ that he feels "some moral responsibility for the poor CDO [Collateralized Debt Obligation] ratings" he issued and added, "I was part of the process that did all this damage, and I feel I should try to do something now to make sure it doesn't happen again."

Here's the WSJ:

Kolchinsky said Moody's "gave a high rating to a complicated debt security in January 2009 knowing that it was planning to downgrade assets that backed the securities. Within months, the securities were put on review for a downgrade.


"Moody's issued an opinion which was known to be wrong," Mr. Kolchinsky wrote in a July letter to the rating firm's chief compliance officer, a copy of which was reviewed by The Wall Street Journal. In the letter, Mr. Kolchinsky cited other instances in which he believes inflated ratings were given to securities.




Moody's is also being investigated by California Attorney General Jerry Brown who said recently that the agencies "worked behind the scenes with the same Wall Street firms that created them. For their work, the agencies earned billions of dollars in revenue, at a rate double what they earned for rating other financial products."

Despite the increased attention of late, Moody's couldn't even be bothered to attend a recent hearing by one of its state regulators. The New York State Insurance Department was hoping to discuss Moody's still rather ambiguous rating methods but was shot down, reports Reuters.

Moody's decision to ditch the hearing pushed New York state officials to consider removing them from its list of approved rating agencies. Several key bodies in the insurance industry may already be trying to distance themselves from the Big Three agencies.

Here's more from Reuters:

"With nearly $3 trillion of rated bonds, the insurance industry is the largest sector of the U.S. financial services industry to rely on capital ratings, according to the National Association of Insurance Commissioners (NAIC).


The three leading ratings firms -- Moody's, Fitch and Standard & Poor's -- have been criticized for fueling the financial crisis by assigning and maintaining high ratings on mortgage-backed securities, even as concerns about the health of the U.S. home market grew.


The NAIC, which represents state insurance regulators, wants to lessen its reliance on the ratings firms, according to a March report. The group has also held discussions over whether to launch its own system for assigning ratings."


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