observing

this is for you,

Ex-Moody’s analyst: ‘By 2006 it was toxic everywhere’

William J Harrington talks to Joris about what he loved and hated about the rating agency, and why the system broke down

William J Harrington was a senior analyst at the rating agency Moody’s between 1999 and 2010 in New York. Since then he has been campaigning for reform and drawing attention to ongoing problems with ratings. Bill is coming into the comment threads here to answer your questions and discuss his views.

“The rating agencies have been the all-purpose bogeymen for the crisis. They bear a heavy responsibility, absolutely, but this exclusive focus obscures how the problems are embedded in the whole system: the big banks, accountancy firms, financial law firms, investment firms, regulators, the financial press. The rating agencies have done us a disservice by allowing so much of the blame to rest on them. They are effectively protecting these other players – who seem quite happy with this arrangement. Meanwhile, people at rating agencies say: ‘Just blame us, we’re used to it.’

“The rating agencies are such small entities in such a huge industry. They are like the Panama canal. Crucial but very small. Worldwide the nine big registered rating agencies have less than 4,000 junior and senior analysts working for them, combined across all activities. JP Morgan alone employs a quarter of a million people. Again, this state of affairs seems to suit the big players well. The rating agencies are one moving piece in the machine that they can push around.

“An added problem is that rating agencies form an oligopoly, with Moody’s, Fitch and S&P [Standard and Poor’s] controlling 97% of the market between them. If there were many significant rating agencies of varying sizes and ownership structures rather than three indistinguishable large ones, then if a few changed their approach it would be hard for the rest to simply continue to go along for the ride. Currently, this is not a self-correcting system.

“The CEO of Moody’s in the run-up to the fiasco in 2008 is now … still the CEO of Moody’s. Last year his compensation was $6m, in line with his five-year average. Rating agencies make so much money … Moody’s has never had a losing quarter. This is why analysts who follow Moody’s for investors really like Moody’s. Moody’s always makes a profit.

“I have asked people at Moody’s: why didn’t you fire those responsible? But that would be an admission of liability, I was told. Worse, precisely the managers responsible for the instruments that blew up have been rewarded and promoted. I don’t believe in conspiracies but here you really have a small cabal of people doing this.

“The cliched idea about rating agencies seems to go like this: a deal to rate a complex financial instrument came in, we stamped it triple A and collected our check. This is a canard. People were working all day on these things, and in the end there would be a committee vote on whether to extend a triple A rating.

“How it works: you have junior analysts, senior analysts and management. Together we work through the instrument, running our models and finding out exactly how it is designed. It is a constant collaborative process between junior and senior analysts and management at Moody’s, plus the bankers. At the end there would be a committee meeting on the basis of one man, one vote: juniors, seniors and management were ostensibly all equal. I loved that system, to go into committee and cast your vote. My family is from New England, where the town hall meeting was invented. It’s a beautiful tradition to stand before your peers and express yourself in this way.

“Rating agencies are powerful. Without that AAA rating the bank cannot sell the instrument. Even if we’d delay our rating by a few days because of further questions, the bank would look bad, having to explain the delay to their clients. So the goal was for bankers to improve the instrument in such a way that our models would record AAA results and we could proceed to committee to vote.

“Over time this system broke down. Management began to promote those analysts who kept the machine running, who didn’t push back against bankers. At the same time they hired more and more junior analysts who were cheaper. These junior analysts were impressive in their own right, just probably too inexperienced by, say, 10 years.

“More and more it was the bankers who drove the process. They became bolder, as they discovered that they’d get their rating without having to improve an instrument. In 2004 you could still talk back and stop a deal. That was gone by 2006. It became: work your tail off, and at some point management would say, ‘Time’s up, let’s convene in a committee and we’ll all vote “yes”‘. Issues brought up by analysts in committee would be dismissed, or management would park them, saying ‘Let’s make a note of that’. Or: ‘I am glad you’re raising it’ – nothing would happen. You knew that while management talked the talk in the committees and big group meetings, they would have agreed to other things with the bankers earlier. Again, it was never rubber-stamping. Most analysts did not go on autopilot. It was more subtle.

“By 2006, I concluded that the committee process for these complex instruments had irredeemably broken down. I moved full time to a derivative sub-sector where I still felt it was possible to make committees work.

This is why it’s easy for me to talk about all this. Also, when I walked out in 2010 after having wound down my responsibilities I didn’t take a “package”. If I had I might have gotten a year’s salary – but I’d have to sign a ‘non-disparagement’ clause which meant that I’d remain silent about what I saw. By the way, everything I am writing about now, and everything I am telling you, I raised all of that when at Moody’s. I never leaked anything to the Wall Street Journal. I could have. But I never did.

“In my days it was individual managers who set the rules of how to interact with the bankers: for instance whether we could scream back at them (we could not). Management is the big problem, bankers or no bankers. And there is no way to get around management. There is no structure, no attempt to evaluate committee proceedings based on analyst contribution over time. Moreover, managers have great discretion to reverse committee outcomes by essentially calling a foul and insisting on a do-over.

“In response to the crisis Moody’s has changed its committee format somewhat. These days junior rating analysts vote first, to prevent them from taking their cues from their superiors. This looks like a solution. But senior managers can send all sorts of non-verbal signals. Junior and senior analysts take their lead from managers who oversee them both in committee and in all other matters as well, for instance compensation and promotion. If management makes it clear there is no downside for letting something go, for overlooking potential problems in an instrument … To be sure, every analyst is individually responsible for their votes no matter how toxic the environment. No one is forced to work at Moody’s.

“Rating agencies work differently from banks, law and accountancy firms. These are often solo practices where small groups of people form teams which work on the premise that you eat what you kill – bring in a lot of business and you make a lot of money. Then within the team there’s a star system where some players get far more than others.

“Moody’s is different. Our department’s revenues fed into one big pot, together with those from other activities – Moody’s rates corporations, countries, derivatives and many other things. Moody’s Corp, the ultimate parent, earned profit margins of 90% from our group.

Another difference with law, investment banks and accountancy is that teams there are often poached wholesale by competitors. That would never happen in rating agencies. You just wouldn’t jump ship and join Fitch. By the way, our management would always make fun of Fitch, as in: that Mickey Mouse shop, they’ll rate anything.

“I trained as an economist and worked for Merrill Lynch but I knew that was a training ground. A rating agency suited me much better. I liked being able to turn off work at night. I liked working with lots of different banks, and was happy to argue with bankers. I liked the systemic thinking that rating requires, looking at lots of variables, and I am comfortable telling people when there’s something I don’t understand. I never sought a management role, I didn’t like the way they threw their weight around in committee.

“I knew rating agencies were seen in the industry as losers and also-rans. I didn’t care. I didn’t go to conferences, to industry parties. The reality is they attract rather different kinds of people. Junior and senior analysts alike were exceptionally intelligent, many with PhDs.

“Even when the environment turned toxic in 2006, I stayed and accepted that I might be fired for doing so or that I might feel obligated to resign – by then it was toxic everywhere. I expected the financial system to fall apart, it was inevitable.

“In investment banks people always seem to want more, more, more. The reward system is just so … straight. You see people get old before their time because their primary concern seems to be find the next deal. They seem to lose everything that makes them unique. And they have this enormous sense of self-importance. Moody’s really suited me, it clicked.

“In cross-industry surveys Moody’s has received a 100% score as a good place for gay people to work. People would sometimes ask, coming into Moody’s: ‘Why is it so gay here?’

“I suppose that once a place establishes itself as gay-friendly, others will gravitate towards it. I do suspect some of the most toxic managers at Moody’s liked to hire beaten-up people who may have felt they had few options – getting people indebted to them by not being homophobic.

“Being gay in finance has left an important stamp on my life. I remember when I was interning at Salomon Brothers – in those days a venerable firm. They offered me a job and I went around introducing myself to people on the trading floor, as was the protocol. At one point a trader looked at me and said: “Salomon Brothers is great. Unless you’re a faggot. I hate faggots.”

“I had trained myself not to flinch since I was 10, so I didn’t. It was horrible. This was 1991. Nobody was out on the floor and I wanted to come out at my own speed without having to lie. I never went along to a strip club, never pretended to have a girlfriend. I believe discrimination blocked me at Merrill as well although I started coming out anyway and some people responded positively. Being openly gay was not an issue at Moody’s.

“I don’t want to reveal my pay at Moody’s; these things are private. I will say that I was one of the two top analyst earners worldwide by 2004-2005. But I made less in salary and bonus than Goldman Sachs whistleblower Greg Smith’s $500,000. Typically compensation was 60% salary, 40% bonus – with that bonus calculated primarily on the basis of the whole firm’s performance and secondarily on our own department’s.

“One misunderstanding is that the problems that caused the crisis are no longer with us. But banks post complex financial instruments as collateral to central banks. These still follow the ratings to assess the value of these instruments. This means that re-evaluating those ratings and downgrading them will have serious knock-on effects on the capital base and hence the financial health of banks.

“Another misunderstanding is that we can start assigning triple A-rated asset-backed securities (ABS) again. There are problems baked into ABSs, in particular the derivative contracts underpinning them. The problem is what happens with the ABS when the bank counter-party for a derivative hedge becomes insolvent. Last, rating agencies make bailouts more likely by factoring open-ended taxpayer support into bank ratings.

@Observing (…)

Why debate with party hacks who are blinded by party colours? They don’t get it. The global economy is tough but Barbados tourism numbers has dipped under our neighbours. Concern Bajans must ask why. Minister Sealy boast of the fact that our hotel room revenue rate is the best ever. It is the only indicator which he shouts about.

@David

yes if we are getting fewer tourists and more revenue then it means that we are maximising the spent of tourists. Isnt this a good thing as long as the revenue for each hotel is at least above the break even point

@To the point

One KPI does not a summer make. What some of us are trying to wrap our heads around is why is Barbados trending South when compared to our neighbours in the region. This is the point.

@carson
If i were a party hack I wouldn’t be here. 😉

Your lengthy cut and paste article speaks to the role of the rating agencies with respect to the global recession. We’re speaking strictly about their rationale for downgrading Barbados. One thing at a time please!

“To remind Bajans that it dangerous to put the fox in charge of the hen house and the rats in charge of the cheese”

But Carson, we all know that foxes and rats have easy access to the costume store and therefore fool gullible persons like you and I. Do you know who are the real foxes and rats?????

@investigator
i never disputed “the state of occupancy in hotels.” I highlighted the state of occupancy in some hotels as opposed to others, then further went on to mention that occupancy does not translate into tourist spending which is the real boon to the economy. This perchance was mentioned in the Moody’s downgrade. You are free to debate any of this with any facts that you may have!

@TTP
“He has five more years waiting.”

But supposed I am a born and bred, blue card carrying, bleed to the death, raise up in George Street DLP die hard???? You sure you want to say this?? lol.

@David
“Why debate with party hacks”

Because Barbados deserves a better, higher, more consistent and intelligent level of discourse and debate from everyone regardless of party colour. That’s how we progress as a nation. These guys have to come better if we are ever to raise our standard.

@observing

i stand by what i say, and i can assure u that u r a red card member and yes u have five more years to wait before ur red card will take prominence.

Observing(…) | December 26, 2012 at 9:03 PM |
Are you sure these are the figures you want to present?

Very sure.
Barbados is down mid range between -1.7% and-6.7% not extra ordinary in the recession. I expect the marketers wish Barbados was 8% up, thats not going to happen with its source markets under severe economic stress. You doom and gloomers want to make Barbados the odd man out, the super duper disastrous performer. It isnt so my friend the world economy is performing badly we are just part of it. Rich and famous playground Bermuda is a striking example a half hour flight away from the biggest economy the world has ever known and its down -4%. Barbados 4,000 miles away and down -4.8. Think.

Investigator,
I really don’t think its a case of doom and gloom, but more about addressing the clear and obvious problems with our tourism product. Please name one other regional competeting destination (apart from Cozumel) that is down at least 34,000 long stay visitors so far (until end of November) this year?
Yes! some of our hotels may be full over Christmas but sadly one week doesn’t pay the bills for 52.
November was a disaster (down 18.7 across all markets) with the single only market (Germany) showing any increase at all (153 extra people).
The CTO is reporting an increase of around 5 per cent from the US and Canada across the region, while Barbados is reporting a double digit decrease from those two sources.
It’s so easy to blame everything on the recession.

@adriin

what are the hotelers doing to address the problems, instead of looking for hand outs from governemnt.? Hasnt the governement continued to market barbados as a tourism destination? Is the marketing straegy flawed and what changes would you recommend, including asking the hoteliers to contribute some of their pofit to the market budge?

Cant hotelers consider forming their own tour companies in major markets instead of relying of the cut throat tour operators?

and what role should the owners of these hotels play in marketing their business it seens evereything in the tourism industry is left up to govt.not one mention or suggestion by any have been said about management role in marketing .all i hear is GOVT! GOVT! GOVT! gimme gimnmme gimme.

ac,

If we left it up to Government, many of our tourism business would be bankrupt. YES! I agree that the industry could do more for themselves but I can assure you that small hotels like ours have never looked to Government (s) for any meaniful guidance or support. Government contribution to our business is keeping us waiting over two years for $30,000 in VAT refunds.
What sort of incentive do you think that is for our hotels to upgrade and refurbish?
We (P&Q) ploughed well over $100,000 (of our OWN money) into building the re-DISCOVER the Caribbean Show which brought around $1 million of foreign exchange to Barbados annually, only to be told that the BTA would not support it by even taking a $500 stand at the event as stating they did not have two persons out of their 150 staff to ‘man’ it for a day and a half.

@Adrian

Again to your last comment, we have shown on another blog that Jamaica has concessions to the tourism sector legislated, why? Because it is a strategic industry.

@Bushie

Agree with you. It is why BU, Observing et al have been calling for some serious evaluation to be made of the industry and how we proceed.

@ David
“….calling for some serious evaluation to be made of the industry and how we proceed…”
***************
That means that you do NOT agree with Bushie.
There is nowhere to “proceed” with a dead industry. The best that we should do with tourism is to ‘make it as comfortable as possible’ for the next few years while we exploit the next developmental phase….but this is REAL LATE…

If we had leaders with vision over the past 30 years we would have long identified a new post-tourism phase and would have been well on the way by now …..that way, we could have just shot the sick tourism animal and put it out of its misery now.

NOTHING LASTS FOREVER. Barbados is in the enviable position of having done EXTREMELY well from tourism, however instead of using that success to identify and develop the next cycle, we like true idiots, assume that sweet life will continue forever….talking shoite bout wanting to become a “developed” society and ’bout a car in each garage and a graduate in each house…. PURE STATUS AND SHOW.

Now that the Goose is getting old, we scrunting with high debts, old infrastructure, poor leadership, no strategy, no plan, and a lotta complainers….

The REAL QUESTION is ….What after tourism…?
If we don’t find an answer REAL fast, the default answer will be hell..

@Bush Tea

If you read the attempt at a development plan for tourism, if you listen to the Governor of the Central Bank, if your listen to the Prime Minister, if your listen to the Prime Minister in waiting, they are all pinning their hopes on revitalizing the tourism industry. The interesting point is that there are heavy linkages to the international business. It is about making the best of it as you say because there is not other avenue being explored at the moment. What alternative do we have that can generate the forex needed to fuel the consumption monster?

Will someone please hurry up and unplug these energy sapping washing machines and dryers?

Someone said earlier only the rich are travelling, I disagree, the babyboomers are tavelling, us old grey haired pot bellied tourists that have just retired with usually a pretty good pension. Foremost in our mind is, yeah I want to see the pyramids… but is it safe? Do something about crime how you inforce it and how you address it, you cannot keep sweeping things under the rug. Turn the 150 people at the bta into policemen they will do more good. Re brand become the safe island, and mean it, increase sentences for crimes, have road gangs cleaning up the island for time off their sentences Safety, Safety Safety teach it, promote it enforce it but most of all sell it.
.

ac | December 27, 2012 at 10:05 AM |
And to you David you seems of recent to be showing alevel of “intolerance” regulate to differing opinion.

Bang on target ac our boy David did a 360 he is completely backing Owen and the Bees now. There was a time when he made us believe he was balanced. Not any more. It makes you think as is the case with Sanka Price and Albert Brandford he get promise to feed at the trough if the red party wins. He’s calling discredited Owen Arthur the PM in waiting. Well some of us have news for him Owen and the Bees shall not get our votes no matter what. Time will tell the eventual winners.

@ 1000 pounds of blubber | December 27, 2012 at 4:20 PM |

So you and ac are attacking David BU, are you now?
Not a good sign. Sounds like acts of desperation.
Now if you are so confident why not announce the date of the general elections as a New Year message and gift to the people of Bim?
Or do you intend to go until 13 May 2013 meanwhile having your last draught of the swill from the pig trough containing the remaining 10 pounds of blubber.

But here is a new year wish from the miller to you, blubber! The people deserve the government they currently have. The piggy mess is yours to clean up.

@Miller
i joined the blogging fsmily less than two years now, and from that time, you, enuff, observing, scott who seemed to be hibernating, enuff, among others have been calling for elections. I am sure the PM has stated that the gove will serve it term. Your team predictioms have been far off. Elections will be called when the PM is ready and your thiefing team will get an opportunity to vie to share in the fatted calf, incluing you.

According to retired Permanent Secretary William Layne, Barbadians were offered the chance to buy the shares. Perhaps one can say that Arthur knew that the immature investment climate and the lazy comfort of Bajans would have made his ultimate objective achievable i.e. sell to external customer to get forex.

Sandy Lane Hotel’s general manager Randal Wilkie said tonight that Sandy Lane had fantastic occupancy for the year 2012 and he expects 2013 to be even better.

How come this sort of news never makes it to Barbados Underground?

It goes without saying that ADRIAN LOVERIDGE will never mention this sort of news.

More news sure to upset ADRIAN LOVERIDGE and make him reach for the PEPTO BISMOL:-

THE HEADLINE

CHEER FOR HOTELS(this will bring sadness to Adrian)

Sharon Hugh-white(general manger)Bougainvillea Beach Hotel, “What has happened was that we had incredibly good winter last year(when adrian was saying everthing so bad, MY WORDS)but so far this year and going into 2013, we have exceeded all of our occupancy levels that we had fo 2011/2012.

So we are forecasting a very good winter season and beating all our occupancies from last year.”

How come that I am the only person seeing this kind of news?

Somehow this type of news bypasses DAVID(blog owner)AND ADRIAN LOVERIDGE(gloomanddoomer).

More to come…………

@David

why did you refer to a blogger previous blogging name to let bloggers know who the current blogger used to be? Is this a part of your intolerance that Ac is speaking about. As long as the blogger did bot have more than one handle, there was no nee for such action.

just like a poor blog is defined by more than a poor blog