All the Devils Are Here [79]
The analysts in structured finance were working twelve to fifteen hours a day. They made a fraction of the pay of even a junior investment banker. There were far more deals in the pipeline than they could possibly handle. They were overwhelmed. “We were growing so fast, we couldn’t keep staff, and we were grossly underresourced,” recalls a former Moody’s structured finance executive. Moody’s top brass, he says, thought the mania would end with home prices flattening out, and as a result they wouldn’t add staff because they didn’t want to be stuck with the cost of employees if the revenues slowed down. “They were so stingy,” he says. At both Moody’s and S&P, former employees say there was a move away from hiring people with backgrounds in credit and toward hiring recent business school graduates or foreigners with green cards to keep costs down.
And of course nobody had the time or the inclination to examine the actual mortgages upon which this entire edifice had been built. If they had done so—if they had taken a hard look at the subprime mortgages that were at the heart of the securities they were rating triple-A—it would have meant putting an end to an immensely profitable business. “It seems to me that we had blinders on and never questioned the information we were given,” a former Moody’s executive later wrote. “It is our job to think of the worst-case scenarios and model them. Why didn’t we envision that credit would tighten after being loose and housing prices would fall after rising? After all, most economic events are cyclical and bubbles inevitably burst.”
After leaving Moody’s, Mark Adelson joined Nomura Securities, where he was the head of structured finance research. At securitization conferences, he would look around at the audience and think to himself, “No one in that room had ever loaned or collected back one red cent. Any schmuck can lend it out. The trick is getting it back!”
In the fall of 2007, after it all started melting down, a Moody’s managing director wrote in a memo, “My recommendation is that we do not rate ABS [asset-backed securities] CDOs. The reasoning behind this recommendation is that due to the complexity of the product and multiple layers of risk, it is NEVER possible to have the requisite amount of information to rate.” But that had been true long before 2007.
By the fall of 2005, Moody’s market capitalization had grown to more than $15 billion. That was roughly the same as Bear Stearns. Yet Bear Stearns had 11,000 employees and $7 billion of revenue, while Moody’s had 2,500 employees and $1.6 billion of revenue. Moody’s operating margins were consistently over 50 percent, making it one of the most profitable companies in existence—more profitable, on a margin basis, than Exxon Mobil or Microsoft. Between the time it was spun off into a public company and February 2007, its stock had risen 340 percent. Structured finance was approaching 50 percent of Moody’s revenue—up from 28 percent in 1998. It accounted for pretty much all of Moody’s growth.
And in August 2007, Brian Clarkson was named president of Moody’s. His compensation that year was $3.2 million.
9
“I Like Big Bucks and I Cannot Lie”
It was the 2004 holiday season, and a college student—let’s call him Bob—was home in Sacramento. One night, out on the town, he met another young man—Slickdaddy G, Bob nicknamed him. Slickdaddy G, who was twenty-six, was a “larger-than-life personality type,” Bob recalls. “He had perfectly highlighted blond hair, short and gelled, perfect white teeth, perfect bronzed skin.” He also had his own limo driver and a seemingly endless supply of money. Bob joined Slickdaddy G for a night of club hopping, picking up pretty girls and drinking Dom Pérignon. The crew ended up at a penthouse apartment—it was just called “the P”—where an “insane party” was taking place. “A DJ, and more girls, booze, and drugs than