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By Root 3604 0

the asset-backed group was longtime Moody’s analyst Mark Adelson. Adelson was, in some ways, the opposite of Clarkson—a careful, cautious, somewhat skeptical analyst. He had been involved in structured finance seemingly forever; as a young lawyer in the 1980s, Adelson had worked on several of the early deals put together by Lew Ranieri and Larry Fink. Perhaps because of his long experience, he was always less willing to accept uncritically many of the arguments made for mortgage-backed securities. When underwriters began reducing their credit enhancements, claiming that the securities had proven themselves with their good performance, Adelson didn’t buy it. The fact that an asset class like housing had performed well in the past said nothing about how the same asset class was going to perform in the future, he believed. For a very long time, Moody’s backed Adelson, for which he would always be grateful. But his skepticism was out of sync with both the market and the new Moody’s. “My view wasn’t the most widely held one at Moody’s,” he says now. “You spend a lot of time doing soul-searching when you’re looking one way and everyone else is looking the other way.” As Clarkson was rapidly promoted, Adelson was eventually moved out of asset-backed securities. In 2001, he quit.

There had long been tension between the corporate bond side of Moody’s and the structured finance side; Clarkson’s ascension signaled that structured finance had won. More than that, the culture of the structured finance side had won. Bond analysts, even in the good old days, regularly faced pressure to issue favorable ratings, but Moody’s had always backed them when they resisted. Not anymore. Soon after Clarkson took charge, Moody’s began making a point of informing its analysts of the company’s market share in various structured products, according to a lawsuit filed in 2010 against Moody’s by the state of Connecticut. If Moody’s missed out on a deal, the credit analyst involved would be asked to explain why. (“Please . . . advise the reason for any rating discrepancy vis-à-vis our competitors,” read one e-mail.) Michalek, who had a reputation as a stickler, said that Goldman Sachs once requested that he not be assigned to its deals. Gary Witt, the Moody’s executive who took the call from Goldman, later testified that he was told that not complying with its request “would result in a phone call to one of my superiors.”

“When I started there, I don’t think Moody’s managers knew what their market share was,” says one former employee. “By the peak of subprime, there were regular e-mails every time Moody’s didn’t get a deal.” Another former managing director says that Clarkson used to tell people, “We’re in business and we have to pay attention to market share. If you ignore market share, I’ll fire you.”

“When I joined Moody’s in late 1997,” Mark Froeba told investigators, “an analyst’s worst fear was that he would contribute to the assignment of a rating that was wrong, damage Moody’s reputation for getting the answer right and lose his job as a result. When I left Moody’s, an analyst’s worst fear was that he would do something that would allow him to be singled out for jeopardizing Moody’s market share, for impairing Moody’s revenue or for damaging Moody’s relationships with its clients, and lose his job as a result.” (In prepared testimony for the Financial Crisis Inquiry Commission, Clarkson denied that “Moody’s sacrificed ratings quality in an effort to grow market share.”)

Examples:

• In August 1996, after Commercial Mortgage Alert noted that Moody’s share of commercial mortgage-backed securities was just 14 percent—largely because it was being tougher in certain areas than S&P or Fitch—Clarkson responded by saying, “It’s the right time to take a second look.” Moody’s market share soon rose to 32 percent.

• In 2000, Moody’s had 35 percent of the mortgage-backed securities market, according to Asset Backed Alert. By the first half of 2001, it had jumped to 59 percent. Rivals claimed Moody’s had lowered its standards, but Clarkson attributed