Raynes raised concerns about ratings to his superiors several times when he was at Moody's. “Moody’s should be liquidated right now. They need to be put out of their misery, and the CEO should resign now,” he says. Talking about the deal Kolchinsky raised questions about, Raynes qualifies it as “bullshit” one. "They needed a Baa2 rating to sell it--no one would buy a deal like that right now," he said.
The hits just keep on coming for rating agencies, and not in the feel-good, Top-40 kinda way. Earlier this month,U.S. District Judge Shira Scheindlinruled Moody's and Standard & Poor's could not claim first amendment protection because the ratings in question weren't publicly disseminated. The ruling was specific to a $5.86 billion structured investment vehicle called Cheyne Finance, but could have broader legal implications. David Einhorn of Greenlight Capital told CNBC he's short Moody's and S&P's parent McGraw Hill,calling Scheindlin's ruling a "game changer."Meanwhile, Warren Buffett's Berkshire Hathaway has sold about 8.8 million shares of Moody's stock so far this year, according to regulatory filings. Last week, the SEC passed rules aimed at improving disclosures and reducing conflicts of interest for rating agencies.
The next blow is expected to come Thursday, when former Moody's managing director turned whistleblower Eric Kolchinsky is scheduled to testify before Congress.
Kolchinsky worked for Moody's for eight years and eventually oversaw the group responsible for rating securities known as collateralized debt obligations (CDO).
Today, Kolchinsky feels "some moral responsibility for the poor CDO ratings" issued under his watch,The Wall Street Journal reports. "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."
Perhaps the most damning part of Kolchinsky's critique, as detailed by The Journal, is that Moody's was still employing the same faulty rating process in early 2009, despite the implosion of CDOs and other mortgage-related securities in 2007-2008. "Moody's issued an opinion which was known to be wrong," Kolchinsky wrote to the firm's chief compliance officer in July about a rating issued in January 2009, The Journal reports. (Meanwhile, another former Moody's exec tellsThe Business Insiderthat Kolchinsky is right and Moody's should be "liquidated right now.")
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