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Do you agree with the claim made in the article that credit rating agencies suffer from conflict of interest? What role, if any, did the conflict of interest of the credit rating agencies play in aggravating the financial crisis?

Ratings agencies suffer 'conict of interest', says former Moody's boss

William Harrington attacks agencies for being paid by banks and companies they are supposed to rate objectively

Rupert Neate

A former credit-ratings agency executive has launched a stinging attack on the powerful organisations that can damage countries' economies and wreak havoc in the markets with the stroke of a pen.

William Harrington, a former senior president at Moody's, claims the organisation's senior management interfere with analysts' independent assessments.Ratings agencies have attracted international opprobrium after Standard & Poor's, another of the three big agencies alongside Moody's and Fitch, stripped the United States of its gold-standard AAA rating.

Harrington, who worked at Moody's for 11 years until he resigned last year, said ratings agencies suer from a conict of interest because they are paid by the banks and companies they are supposed to rate objectively.

"This salient conict of interest permeates all levels of employment, from entry-level analyst to the chairman and chief executive ocer of Moody's corporation," Harrington said in a ling to the US nancial regulator the securities and exchange commission (SEC), which is considering new rules to reform the agencies.

Harrington claims that Moody's uses a long-standing culture of "intimidation and harassment" to persuade its analysts to ensure ratings match those wanted by the company's clients. He says Moody's compliance department "actively harasses analysts viewed as 'troublesome' " and said management "rewarded lenient voting".

"The goal of management is to mould analysts into pliable corporate citizens who cast their committee votes in line with the unchanging corporate credo of maximising earnings of the largely captive franchise," he said in the 78-page ling submitted earlier this month.

Moody's, and other credit-rating agencies, were placed at the heart of the US sub-prime mortgage crisis because they over-rated complex nancial products that were based on largely worthless mortgages. Because the agencies gave good ratings to products called collateralised debt obligations (CDO), banks bought risky debts that they would normally have steered clear of.

"In the experience of the contributor, the committees that issued opinions on CDOs from 2005 to the middle of 2006 degenerated increasingly into 'talking shops'," said Harrington, who worked in the department that rated many such products. "In these instances, members felt free to discuss the negative aspects of the CDO but also felt pressure by management to overlook these aspects when voting."

The Nobel prize-winning economist Joseph Stiglitz has identied rating agencies as one of the "key culprits" of the nancial crisis. "They were the party that performed the alchemy that converted the securities from F-rated to A-rated. The banks could not have done what they did without the complicity of the rating agencies."

Internal S&P emails from 2006 appear to show that the agency was well aware of the risks of rating CDOs. "Let's hope we are all wealthy and retired by the time this house of cards falters. :o)," one S&P employee said in an email which was presented as evidence during a US government investigation into the nancial crisis last year. Another email warned that "this is like another banking crisis potentially looming!!"

The US department of justice was last week reported to have begun an investigation into whether S&P incorrectly rated the complex mortgage products.

Harrington warned that the SEC's proposed changes to the regulation of ratings agencies would do little to improve the situation and could make it easier for agencies to pressure their sta.Moody's did not respond to requests for comment.