Rating agency Moody’s is haemorrhaging experienced analysts even as the upcoming Basel II regime for banks increases the importance of the top rating agencies in assessing risk.
Sources say the US company has lost almost 80 people from its structured finance department in the past 15 months. In Europe, Sam Theodore, one of two managing directors – and the star of – the European financial institutions team, left. He was followed by four others from his team.
Mr Theodore has been hired by Dominion Bond Rating Services, the fast growing Canadian company that has expanded into the US and, according to market rumours, is targeting Europe.
Fran Laserson, a Moody’s spokeswoman, insisted that staff losses were not as high as speculated but would not reveal the exact number of departures. “Market demand for our personnel is cyclical. At times we have become contributors to the broader financial community. We are proud that many of our former analysts have become some of our good clients,” she said.
The rating agency expects to name Mr Theodore’s replacement – a City analyst – within weeks.
A Moody’s employee, who asked to remain anonymous, said junior analysts have had to be promoted to positions of responsibility too quickly. However, Moody’s insisted the turnover of staff mainly affected those at junior levels and analyst numbers are quite stable higher up the company.
A top analyst from one rating agency said that agencies used to offer “quality of life and intellectually driven, independent analysis” as a trade-off for the higher salaries paid by Wall Street and the City. The backlash against the agencies – resulting from the Enron and related scandals, agencies’ generous profit margins of more than 50% and their powerful market position – have sparked calls for them to be regulated. The analyst said Moody’s was attempting to improve self-regulation by putting in place “standardised processes that are becoming more important than the opinions of analysts”.
Ms Laserson said transparency was a priority for Moody’s. In June, it published an updated code of conduct, which closely tracks the recent IOSCO code of conduct. Moody’s will publish annual status reports on the code’s implementation.
The Moody’s employee added that the company gave staff options when it listed on the New York Stock Exchange in 2000 and these are now worth cashing in – something that is not helping the agency retain its staff. Moody’s denied this.
Moody’s has $770m in the bank and shareholders are becoming concerned that it is under pressure to spend the funds and may make an ill-judged acquisition.
Ms Laserson denied this. “We don’t expect to make acquisitions not related to the main business,” she said. The agency returns excess cash to shareholders mainly through share repurchases: 1.1 billion shares have been bought back since 2000.
Top rating agencies have traditionally lost analysts to the higher-paying investment banks but rarely at such a fast pace. The current exodus risks having a detrimental effect on the world financial system as the Basel II system relies more heavily on the agencies’ judgment.
