Sylvain Raynes, the ex- Moody’s vice president who says that the agency should be punished for its “pattern of fraud,” explained to us one of the deals he witnessed which he believes was fraudulent.
In 1997, Raynes was working on two deals backed by rental cars.
During the rating of the first deal, there was a bug in the code that rated the deals. (Similar to what happened at Moody’s last year.)
Raynes was responsible for the code, so when he found the mistake, which had given a higher rating than warranted, he went to his superiors: Paul Stevenson, a managing director, and Brian Clarkson, the former head of the agency who got fired last year.
I told them ‘we need to tell investors. I’ll take the hit.'” Raynes says Stevenson told him to “forget it.”
“They told me to shut up,” Raynes says.
The Class A was rated AAA and the Class B was rated Aa3.
Meanwhile, another deal based on similar collateral was rated properly-–Baa2–but that rating raised ire from investors who didn’t understand how two deals with essentially the same collateral could have such a difference in ratings.
Asked how his superiors handled the situation, Raynes says his best guess is that they had to “make something up.”
Raynes believes that Kolchinsky’s testimony tomorrow could bring down the firm. He doesn’t see how it can “recover at this point.”
We’ve reached out to Moody’s for comment and have not heard anything.