The New York Times-20080126-Moody-s Official Concedes Failures in Some Ratings

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Moody's Official Concedes Failures in Some Ratings

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The chief executive of Moody's, the credit rating agency, conceded on Friday that his agency had made significant mistakes in the rating of structured finance products, but added that the agency had been deceived by people who put together the products.

Many such products backed by subprime mortgages have been downgraded from the top rating of Aaa, sometimes to junk status, and their prices have collapsed, angering many investors.

In hindsight, it is pretty clear that there was a failure in some key assumptions that were supporting our analytics and our models, the executive, Raymond W. McDaniel Jr., told a panel at the World Economic Forum, where he heard complaints about conflicts of interest and suggestions that large fees had influenced the ratings.

He said that one reason for the failure was that the information quality given to Moody's, both the completeness and veracity, was deteriorating as the subprime mortgage market grew.

In a brief interview later, Mr. McDaniel did not provide any specifics about who had misled the rating agency.

Rating agencies are paid by the companies they rate, a fact that has been harshly criticized here and elsewhere. The issue is the reliability of the system that generates the ratings, Jacob A. Frenkel, a former central banker who is now vice chairman of the American International Group, said in an interview Friday. If investors are to rely on the ratings agencies, he said, they must be compensated by investors.

Mr. McDaniel vigorously defended Moody's, saying its work was not in some way corrupted by the business model.

He said there would be conflicts no matter who paid the fees, suggesting that a major investor paying Moody's might also put pressure on it to give high ratings to securities the investor already owned.

That drew a strong response from Guillermo Ortiz, the governor of the Mexican central bank. It is stretching the imagination to suggest that the conflict of interest would be comparable if you were being paid by the buyers, he told Mr. McDaniel.

Mr. McDaniel also said that if Moody's were paid by investors, there could be a problem with major investors getting ratings first and access to information being denied to investors who were not willing to pay.

The agencies' objectivity was also questioned by Walter B. Kielholz, the chairman of Credit Suisse. The growth of structured finance brought many new products that could be rated for a fee, he said, adding: I'm not sure the discipline was maintained. He also pointed to the rapid turnover of young analysts at the agencies as a problem.

But Mr. Kielholz argued that blame should be spread around. What happened to caveat emptor? he asked. There seems to be an entitlement that rating agencies be right, and that the highly compensated analysts for institutional investors not be expected to do their own analysis.

[Illustration]PHOTO: Guillermo Ortiz, the governor of Mexico's central bank, addresses the issue of conflicts of interests for credit-rating firms. (PHOTOGRAPH BY MICHEL EULER/ASSOCIATED PRESS)