Moody’s Sacks Structured Finance Head Over CPDOs

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Moody’s is dismissing its structured finance chief, Noel Kirnon, for lapses in ratings of constant proportional debt obligations. Bloomberg notes that $4 billion of these instruments were rates AAA, and some fell in value by as much as 90%.

This move nevertheless seems odd. True, this was a very large value destroying event in percentage terms. However, CPDOs were a very small market in total issuance size. Admitting to failings in this area and sacrificing a few senior employees seems a move designed to mollify critics without admitting to bad practices in bread-and-butter products, which included many structured credits. Similarly, note that the external investigation was limited to CPDOs.

From the Financial Times:

Moody’s, the credit rating agency, on Tuesday said it was beginning disciplinary proceedings against some of its staff as it admitted it had incorrectly rated about $1bn of complex debt securities due to a computer error.

The credit ratings agency said Noel Kirnon, the London-based head of its global structured finance business, would leave at the end of the month.

The move came as Moody’s admitted that an external investigation by Sullivan & Cromwell, the law firm, had shown that members of a key rating committee breached internal codes of conduct over a complex instrument known as constant proportion debt obligation (CPDOs)…

“Some committee members considered factors inappropriate to the rating process when reviewing CPDO ratings following the discovery of the model error.” Mr Kirnon was not on this committee.

However, Moody’s stressed that there was no evidence that Moody’s staff had deliberately manipulated the overall ratings methodology to conceal the bug – and pledged to ensure that the problem did not reoccur.

Note the FT report implies that Kirnon was not directly involved in the cover up. Curiouser and curiouser…..

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  1. Independent Accountant

    Sullivan & Cromwell. Big deal. We may assume this was a setup ordered by the top.

  2. Ginger Yellow

    Doesn’t seem that surprising to me. The error and apparent coverup did a lot of damage to Moody’s reputation, even among people like myself who think they’ve been made something of a scapegoat in this whole mess. There’s clearly a lot Moody’s aren’t saying here – they’re being as vague as they can about what exactly drove the methodology changes, for instance – but it would be entirely appropriate for someone like Kirnon to fall on his sword even if he wasn’t directly involved. This was a catastrophic failure, at best, that happened on his watch.

    “Admitting to failings in this area and sacrificing a few senior employees seems a move designed to mollify critics without admitting to bad practices in bread-and-butter products, which included many structured credits. Similarly, note that the external investigation was limited to CPDOs.”

    Well, what did you expect? Wrongdoing was uncovered by the press in this area, they were forced to investigate, and some people were thrown under the bus. That’s what happens in all businesses. The investigation was always limited to CPDOs – they said as much when it was first announced.

  3. Yves Smith

    Ginger Yellow,

    I suggest you compare Moody’s and the other rating agencies’ actions with Johnson & Johnson’s response to the 1982 Tylenol tampering, which is considered the gold standard for crisis management.

    Seven people in Chicago died because someone had put cyanide into Tylenol capsules. The company:

    1. Immediately recalled all its Tylenol nationwide

    2. Told consumers NOT to take Tylenol until they had investigated the extent of the tampering

    3. Ceased advertising

    4. Reintroduced the product with tamper-proof packaging

    5. Offered customers $2.50 off to try the product again

    6. Lowered ongoing prices

    7. Had sales people make presentations to the medical community to restore confidence.

    Note how comprehensive this response was to an exogenous problem. Do we see anything approaching this level of response from the rating agencies for product failings that were their doing?

    And the fact that you correctly characterize this “let’s go aggressively only after the worst aspects fo the problem” behavior as normal explains why the financial community is going to have a credibility problem for years to come. No one is willing to do the right thing, which is a deep self-examination and serious reforms. Due to their liability shield, the rating agencies are one of the few who can do this openly, yet they won’t.

    Ah, but J&J placed public safety first, profits second, yet was able to save a brand that the experts assumed was dead.

  4. Anonymous

    Yves, agree with your second last paragraph, spot on. The comparison with J&J is ridiculous though: last I checked there were no public health concerns (stressed out investment bankers notwithstanding) with regard to Moody’s products.

    Noel Kirnon leaving is just a giant ass-covering exerice: a nubmer of middle level manager have been pushed out of the company and yet the CEO, Ray MacDaniel, whose leadership qualities are sub-optimal to say the least, seems resolute not to accept any of the blame and stay on. So, not sure re falling on swords etc…

  5. Yves Smith

    Anon of 6:57 PM,

    If you go and read the history per the link, what J&J did was considered radical at the time. The public had already been alerted:

    The nation was warned about the danger of Tylenol as soon as a connection could be made. Police drove through Chicago announcing the warning over loudspeakers, while all three national television networks reported about the deaths from the contaminated drug on their evening news broadcasts. A day later, the Food and Drug Administration advised consumers to avoid the Tylenol capsules, “until the series of deaths in the Chicago area can be clarified.

    J&J could have done nothing, or merely recalled product in Chicago.

    The J&J example is well known in PR and crisis management. Disclose quickly, communicate often, and most important, do everything you can to make the situation right.

    And you think people aren’t going to die as a result of our financial crisis in motion? 8 people in total died from Tylenol. I guarantee there will be at least 10 times as many suicides due to ruined finances resulting from the mis-selling of complex financial products, although no one will be able to connect the dots as directly as in the Tylenol case (and many suicides are mis-classified for religious reasons, or carried out to look like an accident for insurance purposes).

    The marvelous think about our modern financial system is that there are many parents to these disasters, which means the perps can rationalize that they weren’t responsible individually.

  6. Daniel Newby

    “… last I checked there were no public health concerns … with regard to Moody’s products.”

    Try making it through a New England winter on a blown-out pension and $5/gallon heating oil. In five months, the finance war is going to start claiming American non-combatants.

    And the sunspot cycle is looking like it may give us a cold winter indeed. This is likely to turn out badly.

  7. Anonymous

    A friend who lives in Vermont told me there were news reports last winter of people burning their antique furniture to heat their homes.

  8. Tom Lindmark

    Scott Coles, the CEO and sole sharehoder of Mortgages Ltd., the largest private money lender in Phoenix and one of the larger private money firms in the country apparently killed himself three weeks ago(still awaiting autopsy result confirmation). His company is now under the supervision of the bankruptcy courts and about half a billion dollars worth of real estate now sits in idle in half finished mode.

    A well known developer in Phoenix (it hasn’t been widely played up so I am not furnishing his name)shot himself a month ago. His projects are quickly crumbling.

    Business can be hazardous to your health.

  9. Anonymous

    Anon here again. Right, oil prices are due to Moody’s getting CPDO ratings wrong.

    Yves, I did carve out stressed out investment bankers… Still, connecting suicide to a particular bad rating (or even a large number of them) is a little too much.

    That’s not to say, Moody’s could and should have been more aggressive in addressing the issues.

  10. Anonymous

    Blatent scapegoating. Credit agency decisions (allocated ratings) are a committee decision.

    Given the bad PR surrounding this termniation, there very well may be an additional suicide.

    Rating Agencies rarely get the ratings right on entities that collapse. Everything is rosy and BBB+ or higher, until the collapse or near collapse where the ratings are notched down daily until they reach the appropriate sub investment grade or junk grade rating.

    Also, rating agencies enable banks not to think too hard about the credit and enable them follow the agency rating rather than determining their own view. This is not the rating agencies fault of course but banks or leaders/managers within banks are too afraid to do proper analysis and put their balls on the line with personal opinion or to go against the flow ie general concensus. That is how our financial system is basically run – general concensus or committee view and we all know that committees are only famous for camels!!

  11. Anonymous

    For the want of a nail, a shoe was lost, for the want of a shoe, a horse was lost, for want of a horse, the rider was lost….

    Yves’ point is that Moody’s and the rating agencies’ responsibility for the financial mess goes well beyond CPDOs. That was one of his big criticisms, that the CPDO actions are merely going after the most egregious failing, not the more common ones that have led to massive writedowns at banks.

    For my money, the most culpable parties are the mortgage brokers and the rating agencies, although the point about committees is well taken, they allowed themselves to be used. You can attribute a considerable amount of responsibility to rating agencies, after all, they KNEW their ratings were a vital element in decisions. if they hadn’t given overly flattering ratings to a lot of structured paper, yeah, we might still have had a credit bubble, but probably only 1/4 as bad as what we got.

  12. Anonymous

    I may have gone slightly off topic as my comment about rating agencies was broad and not limited to CPDO’s.

    The rating agencies are really not that great at predicting (or accurately rating) the major corporate collapses ie Centro of late, Enron the list goes on and on.

    I dont know who I believe to be the most culpable, after all the mortgage brokers would generate business (ie new mortgages) only as fast as the market would allow them ie they wrapped and securitised all these mortgages and kept doing so at ever increasing rates due to easy credit and capital markets appetite for securitised transactions (which were rated by the agencies to ensure demand/success of the securitisation).

    The mother of all chickens came home to roost due to the sub prime mortgages which were securitised and fundamentally had no business being securitised and/or rated at the levels which they were. I believe easy credit and all the other economic indicators ie savings, inc consumer debt etc etc would have resulted in recession anyway but possibly with less (less, not none) financial markets pain

  13. Ginger Yellow

    “And the fact that you correctly characterize this “let’s go aggressively only after the worst aspects fo the problem” behavior as normal explains why the financial community is going to have a credibility problem for years to come.”

    I don’t disagree. The agencies are going to have a credibility problem for a very long time. I was merely saying Moody’s response is not surprising. Businesses are unlikely to say: “Yeah, our entire approach was wrong, but we’ve fixed it now, trust us.” You admit that the Tylenol approach was considered radical.

  14. Anonymous

    Something radical is what the rating agencies need right now…look at how long it took them to act on the monolines/i-banks? What main street investor could find them to have any credibility? Assuming, here, that Wall St. has already discounted their views practically to zero. The govt and its talk about increasing regulation of them seems just to want to be in on the game somewhat more than it already is (in terms of the curious cases of its as-yet untested backing of Fannie, Freddie and Ginnie offerings).

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