As the bottom fell out of the housing market and complex mortgage-backed securities began tanking in 2007, a strange thing happened at Moody’s Investors Service, one of the largest firms that rate bonds for the risks they pose to investors.
Moody’s blue-ribbon board of directors stopped receiving key information from an internal committee that was supposed to keep the board informed of risks to the company, a McClatchy investigation has found.
Sure – why would you want to find out that your business helped perpetuate a fraud? But it gets worse:
As McClatchy reported last year, the credit-rating agency had been handing out Triple-A grades like candy for Wall Street mortgage securities that were backed by pools of home loans that turned out to be junk.
When the global financial crisis deepened in 2007 and the integrity of bond ratings came under attack, the captains of industry on the Moody’s board seldom asked tough questions, according to former Moody’s executives who made presentations to the board.
That’s important, because the legislation to overhaul financial regulation that’s now moving through Congress aims to empower ratings-agency boards by requiring a direct line of communication between the company officials who police for risks and the boards. It’s not clear whether that would have made any difference at Moody’s.
The findings of the new McClatchy investigation not only call into question the value of the new regulatory approach lawmakers are drafting; they also help underscore the widespread criticism that many corporate boards practice crony capitalism rather than independence.
I’m not sure that even Barack Obama’s magical powers can rein in an industry that so totally owns Congress. (I’m not sure he’s ready to go as far as he needs to to do so, even.)
But if ever a sector of the economy ought to be forced to bolt on training wheels, the financial one is it.