Annals of Pathetic CEO Communication, Moody's Edition

When a company runs into trouble, it turns to its chairman and CEO (if they are the same person) for leadership. If that person is someone like MBIA's Jay Brown, he provides it, showing backbone and passion and clarity of vision. On the other hand, if that person is someone like Moody's Raymond McDaniel, he utterly flubs the test, coming out instead with a formal statement lacking so much as a hint of humanity or certitude. Just look at the thing:

As you may be aware, there have been reports in the news media of an error in a model that Moody's Investors Service used in certain of its ratings of European constant proportion debt obligations (CPDOs). Moody's rated a total of 44 European CPDO tranches, representing approximately $4 billion in rated securities.

Reports in the news media of an error in a model? Ugh. A horrible passive-voice construction which doesn't thank the FT for exposing the error, or even mention the paper by name at all - and which also deliberately misses the main point of the FT's article, which was the cover-up, not the original computer bug.

We recognize the seriousness of the questions raised by these media reports. Upon learning of this situation, I directed our Legal and Compliance staff to undertake a thorough review of our European CPDO rating process. The law firm of Sullivan & Cromwell has been retained to conduct this review and will report back to me upon completion of their fact-finding and assessment. I will then take appropriate action to respond to the findings.

"We"? Who is this "we"? And what are these serious questions which have been raised? Are they all about the error in the model? Or are there other questions, much more serious, which you can't even bring yourself to directly address?

What does "upon learning of the situation" mean? Do you mean upon learning about the FT report? Or do you mean upon learning of the substance of the allegations in the FT report? If it's the former, why didn't you take any action originally? And if it's the latter, why didn't you tell anybody at the time? Or, if you only learned of the substance of the allegations at the same time that the rest of us did, then what does that say about your control of the company?

And most importantly, are you so bloodless as to think that ordering one set of lawyers to hire another set of lawyers was really the only appropriate reaction to what had happened? Did you feel incapable of simply calling the principals concerned into your office and asking them directly? Do you really, today, not know whether the FT article is true or false, and need Sullivan & Cromwell to tell you?

I should note that as a rating agency, Moody's often adjusts its analytical models and enhances its methodologies for a variety of reasons, such as to reflect changing credit conditions and outlooks. While the agency has modified analytical models on the infrequent occasions that errors have been detected, it is inconsistent with Moody's analytical standards and company policies to change models and methodologies for any reason other than to improve the accuracy of our ratings.

And why are you quoting, almost verbatim, earlier press releases from your own company? Your PR people said that "it would be inconsistent with Moody's analytical standards and company policies to change methodologies in an effort to mask errors"; you say something pretty much identical. This isn't leading, it's following. Worse, it's following flacks.

Needless to say, our relationships with customers are of the utmost importance to us. We recognize that you may have questions or concerns that relate to this matter, and remain committed to a transparent, open dialogue with you.

If you're genuinely committed to a transparent and open dialogue, you could start by being transparent and open about what you know, when you learned it, and why all of these actions are only being taken in the wake of the allegations being published in the FT. Instead, you come across like a corporate puppet. Weak.

Comments

[Cate Long:]

The article in the Financial Times about Moody’s problems with their models for rating CPDOs raises lots of issues… Moody’s is stating that problems with computer coding for the asset lead to the improper assignment of AAA ratings…

shopyield.com/blog/200.../

2008 May 23 04:52 PM

[Rubens Morse:]

This bashing of Moody's is silly. First of all, they have a pretty strong disclaimer (ratings are provided as statements of opinion and not statemements of fact as to creditworthiness of issuer, are not a recommendation to buy or sell, investors should be their own studies and evaluations of credit decisions, etc etc.) that should protect them from big liabilities, like they did in the past. Rating agencies were sued following the collapse of big companies like Enron and WorldCom, and always won in court. Second, S&P did not make any model or coding error, and came up with the same AAA rating for those CPDO. Moody's stock is extremely undervalued and will come back strongly.

2008 May 24 03:46 PM

[bearfund:]

Rubens, that's not the point. Felix is dead right; this is about leadership. If I'm McDaniel, I see FT saying something BAD about MY company - the company I am responsible for leading. It is my job to know whether what FT is saying is true, false, or some combination thereof. It is my job to admit that it is true and tell customers and shareholders what I have done to correct it, or to explain that it is false and to provide evidence to back up that assertion. Saying that I don't know or won't admit what I know does not constitute leadership. And that's in effect what he did. Even if Moody's didn't make any mistakes in its modeling, didn't cover up those nonexistent mistakes, and doesn't have any legal or financial liability associated with this, their response does not inspire confidence.

2008 May 24 06:42 PM

[Nick Gogerty:]

Moody's and leadership, I am looking forward to see if the two of them happen to bump into each other sometime.

2008 May 27 08:17 AM

[Century_XI:]

I view Rubens' point as perfectly valid. I agree that MCO is a bargain a these levels and that we'll make a mint out of it. Those who dump their shares at these prices simply do not understand the strenght of the franchise the three leading credit rating agencies have. The simplest of DCF analyses shows that the P/E for a business with a return on total capital of roughly 50% is well above 20. If concerned about the future earning power of MCO ask yourself: Is this credit crisis the end of structured finance? Or is it simply a one or two year downsweep? When the housing slump ends (which will happen), current fear will vanish and markets will rally and nobody will care again about subprime asset backeds, CDOs, CPDOs and the like. Structured finance deals will regain momentum and the agencies will be there to profit from rating them. As Buffett said, this is a "no brainer".

However, Bearfund is right in that Felix's point was different. And, regarding this, I was struck too at reading McDaniels' verbatim copy of the previous corporate press release. It is indeed dissapointing to see that the CEO could not come up with something better than the bureaucratic quote of a lesser officer.

Fortunately for us, MCO's business is so strong that even with subpar management it is bound to flourish.

2008 May 28 12:45 AM

[Mayor McCheese:]

This is the same ol' Moody's playbook. We've seen it before with Enron and Worldcom. It's a combination of plausible deniability, half-truths, and misplaced self-righteousness. If you believe senior military officials did not have an inkling of the Abu Ghraib situation, then this blatant spin-doctoring and defensive posturing is right up your alley.

2008 Jun 02 09:56 AM