How profit-obsessed were the rating agency CEOs during the housing bust?
Testimony at Wednesday’s hearing of the Financial Crisis Inquiry Commission from a former Moody’s managing director suggests they thought of little else.
Gary Witt, a statistics professor at Temple University in Philadelphia who left Moody’s in mid-2008, said in his prepared testimony that management at the firm was so focused on its market share battle with rival S&P that it was oblivious to the biggest challenge facing Moody’s and its peers.
At the end of 2007, Witt said, management was preparing to address the firm’s top workers at a time when markets were in tumult and the firm’s reputation was in tatters. Managing directors, or MDs, were invited to hear CEO Raymond McDaniel (right).
Witt continues:
“As was their practice, management opened the meeting with a lengthy discussion about our profit margin relative to S&P and how this was viewed by the equity analysts who rated our shares.
“Eventually, an MD from the corporate side of the company raised his hand and asked what management was doing to restore our lost reputation. The question seemed to take the CEO by surprise. I believe this was the question on everyone’s mind and most people in the audience were disappointed that it was not the main topic of the meeting.”
This preoccupation wasn’t Moody’s alone, judging by the transcript of a conference call held around the same time at S&P.
There, Terry McGraw, CEO of S&P parent McGraw-Hill, blithely brushed off concerns from investor David Einhorn about the damage the firm might suffer from its subprime market land grab and the subsequent downgrades of hastily assembled structured securities. Einhorn has said over the past year that he is betting against the shares of the rating agencies, but at the time of the October 2007 call he wasn’t an avowed opponent of the firms.
“I’m wondering how you view Standard & Poor’s from a brand, and what might be happening to the brand as a result of what’s gone on in the structured finance market,” Einhorn asked.
McGraw responded by saying he saw S&P “right in the middle” of the growth of global capital markets that he characterized as “extremely sophisticated and solid.” And was he worried about the S&P brand?
Why, of course not.
“In terms of Standard & Poor’s as a brand, no,” he said. “I mean, you’re constantly growing. You’re constantly learning. You’re constantly involved in not only the rating side of the market, but providing the transparency in terms of all of the financial information products. And we are — we take that responsibility very seriously, and the credibility that S&P has as a brand, in terms of serving the markets in a lot of areas here and around the world, is only going to grow with the growth of the capital markets.”
We’ll see about that yet.