What was Moody's Board Doing Before the Crisis?

McClatchy's News Services has an interesting article titled, Where was Moody's board when top-rated bonds blew up?

The article follows up on a series of earlier articles that they published last year, which sought to dissect the role of the bond rating agencies -namely Moody's, Fitch Rating Services, and Standard and Poor's- leading up to the Great Recession. What is virtually accepted by all parties is that these rating houses gave preferential treatment to clients and inflated the rating value on securities that have now turned out to be labelled as "toxic waste" by every financial institution in the world. As the article states, Moody's for one, "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."

One of the questions that remains to be answered, given the outcome, is what was Moody's board doing during this period?

The article presents a business that scuttled its risk management committee, changed senior management to prevent serious questions and inquiries from being made about their "Structured Finance Division", and a boardroom filled with people either unable or unwilling to understand the activities that were generating profits for the company.

Leading up to the September 2008 Crash:

Moody's dominated the ratings for "structured finance" products — securities backed by pools of loans that are packaged together and provide a monthly income stream to investors.

The structured finance division powered Moody's revenues past the $1 billion mark in 2002, and past $2 billion in 2006. The company's stock price soared nearly six-fold between 2001 and 2007, from $12.70 to $72, which created a huge windfall for its largest shareholder, billionaire investor Warren Buffett.

The board, however, apparently had few questions on the way up — or later, on the way down, a former Moody's officials said.

Not everyone at Moody's was comfortable with the company's philosophy as the housing market began to disintegrate across America. Two executives reached out to Warren Buffett to warn him of the impending situation.  During a October 2008 House of Representatives Committee on Oversight and Government Reform meeting,

Jerome Fons, a former Moody's managing director of credit policy, told lawmakers "the deterioration in standards was palpable," adding that managers "turned a blind eye to this, did not update their models or their thinking and allowed this to go on."

The article evaluates the background of the individual board members at Moody's and concludes that few of them understood or appreciated the situation.  Furthermore, none of them it appears acted with due diligence to verify that shareholder interests were being protected.

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The whole affair stinks.  From the board room to the desk of the lowly bond rating analyst, the people within these companies lied to the general public and investors about the risk and overall value of these toxic instruments.  Why none of these fiends aren't facing criminal prosecution and SEC fraud charges is only a question that officials within the Obama administration can answer.