Eric Kolchinsky, a former Moody’s analyst who oversaw ratings given to the toxic debt that brought our financial system to its knees, is scheduled to testify before Congress today, according to yesterday’s Wall Street Journal article “Congress Takes On Credit Ratings,” by Serena Ng and Aaron Luccheti. His testimony will be taken before the House Committee on Oversight and Government Reform, chaired by Representative Edolphus Towns, who represents the 10th Congressional District of New York. Testimony will also be provided by an attorney representing Standard and Poors.
Mr. Kolchinsky is expected to testify that Moody’s issued ratings on toxic junk, such as collateralized debt obligations (“CDOs”), which Moody’s knew to be inflated, and that inflated ratings are still being issued. Mr. Kolchinsky says that he has “some moral responsibility for the poor CDO ratings’ I was part of the process that did all this damage, and I feel I should try to do something now to make sure it doesn’t happen again.”
The background is as follows. In September 2007, Mr. Kolchinsky raised concerns with senor Moody’s officials regarding high ratings given to new CDOs. Moody’s then transferred him to a different unit, Moody’s Analytics, telling him that the CDO ratings group was “downsizing.” A year later, he filed an internal complaint alleging retaliation, which Moody’s found to be “unsupported.”
In July, in a 13 page letter to senior Moody’s officials, Mr. Kolchinsky questioned a rating on notes that were backed by collateralized loan obligations (“CLOs”), which were in turn backed by corporate loans. Moody’s initially gave the notes a Baa2 rating, but about 4 to 6 weeks later concluded that the CLOs should be downgraded 3 to 6 notches, according to an internal email and internal data reviewed by Mr. Kolchinsky. But, despite its decision to whack the underlying CLOs’ rating, Moody’s confirmed the notes’ Baa2 rating. Mr. Kolchnsky says Moody’s had determined that the notes should actually be rated Caa1, eight notches below Baa2 ? in other words, as “junk.”
Meanwhile, Moody’s “investigated” Mr. Kolchinsky’s concerns and concluded that it had done nothing improper. Then, on September 3, according to the article, Moody’s asked Mr. Kolchinsky to meet with outside counsel for the firm to discuss his letter. Mr. Kolchinsky declined, saying everything he knew was in the letter. In response, Moody’s suspended Mr. Kolchinsky because of his “refusal to cooperate.” He left the firm 13 days later. Mr. Kolchinsky talked to congressional investigators after his suspension, and they invited him to testify.
It will be interesting to hear what Mr. Kolchinsky tells Congress under oath, and Moody’s response to it. Stay tuned.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions, and have aided clients who have been the victims of financial adviser abuse, and scams. Page Perry’s attorneys are actively involved in counseling clients regarding investment abuses. For further information, please contact us.