“In the late ’90s, research and development at Moody’s slowed right down,” says [Ann] Rutledge. “The banks caught up. And then they came to be the ones in the lead.” As the structured finance arms race accelerated, Moody’s and its peers became more passive participants. Where the firm had once been at the cutting edge of statistic analysis (analysing facts) and stochastic analysis (analysing probabilities), soon it found itself trying to keep pace with the latest engineering packages devised by the banks.
“Over time, disagreements with analysts were just smoothed out. And it was no longer the rating agency which always won,” says [Sylvain] Raynes, who left Moody’s to set up his own credit analysis consultancy. “The banks won. Now the modelling is done by the street.”
The agencies were inundated with a huge volume of new structured finance deals that they were being asked to rate. At Moody’s, the flipside to the huge revenue growth was a high-pressure work environment. One analyst recalls rating a $1bn structured deal in 90 minutes. “People at the rating agencies used to say things like, ‘I can’t believe we got comfortable with that deal,’” says Raynes. “People talk about moral hazard at the banks, but the moral hazard for the rating agencies is extreme.”
Read the rest of this full-feature article at Financial Times, “When Junk Was Gold,” by Sam Jones.
