Friday, May 23, 2008

Annals of Pathetic CEO Communications, Moody's Edition

(Felix Salmon) When a company runs into trouble, it turns to its chairman and CEO (if they are the same person) for leadership. If that person is someone like MBIA's Jay Brown, he provides it, showing backbone and passion and clarity of vision. On the other hand, if that person is someone like Moody's Raymond McDaniel, he utterly flubs the test, coming out instead with a formal statement lacking so much as a hint of humanity or certitude. Just look at the thing:

As you may be aware, there have been reports in the news media of an error in a model that Moody's Investors Service used in certain of its ratings of European constant proportion debt obligations (CPDOs). Moody's rated a total of 44 European CPDO tranches, representing approximately $4 billion in rated securities.

Reports in the news media of an error in a model? Ugh. A horrible passive-voice construction which doesn't thank the FT for exposing the error, or even mention the paper by name at all - and which also deliberately misses the main point of the FT's article, which was the cover-up, not the original computer bug.

We recognize the seriousness of the questions raised by these media reports. Upon learning of this situation, I directed our Legal and Compliance staff to undertake a thorough review of our European CPDO rating process. The law firm of Sullivan & Cromwell has been retained to conduct this review and will report back to me upon completion of their fact-finding and assessment. I will then take appropriate action to respond to the findings.

"We"? Who is this "we"? And what are these serious questions which have been raised? Are they all about the error in the model? Or are there other questions, much more serious, which you can't even bring yourself to directly address?

What does "upon learning of the situation" mean? Do you mean upon learning about the FT report? Or do you mean upon learning of the substance of the allegations in the FT report? If it's the former, why didn't you take any action originally? And if it's the latter, why didn't you tell anybody at the time? Or, if you only learned of the substance of the allegations at the same time that the rest of us did, then what does that say about your control of the company?

And most importantly, are you so bloodless as to think that ordering one set of lawyers to hire another set of lawyers was really the only appropriate reaction to what had happened? Did you feel incapable of simply calling the principals concerned into your office and asking them directly? Do you really, today, not know whether the FT article is true or false, and need Sullivan & Cromwell to tell you?

I should note that as a rating agency, Moody's often adjusts its analytical models and enhances its methodologies for a variety of reasons, such as to reflect changing credit conditions and outlooks. While the agency has modified analytical models on the infrequent occasions that errors have been detected, it is inconsistent with Moody's analytical standards and company policies to change models and methodologies for any reason other than to improve the accuracy of our ratings.

And why are you quoting, almost verbatim, earlier press releases from your own company? Your PR people said that "it would be inconsistent with Moody's analytical standards and company policies to change methodologies in an effort to mask errors"; you say something pretty much identical. This isn't leading, it's following. Worse, it's following flacks.

Needless to say, our relationships with customers are of the utmost importance to us. We recognize that you may have questions or concerns that relate to this matter, and remain committed to a transparent, open dialogue with you.

If you're genuinely committed to a transparent and open dialogue, you could start by being transparent and open about what you know, when you learned it, and why all of these actions are only being taken in the wake of the allegations being published in the FT. Instead, you come across like a corporate puppet. Weak.

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