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Why Credit Rating Agencies Go Easy

The Dodd-Frank law requires that credit rating agencies--Moody's, Standard & Poor's, Fitch, etc.--report to the Securities and Exchange Commission whenever an analyst takes a job from a company that he or she helped rate. The revolving door between rating agencies and rated companies has been cited as one reason why the rating agencies were so reluctant to downgrade banks overly dependent on shaky subprime mortgages and exotic derivatives before the house of cards came down in 2008. But until now it was hard to know exactly how many people passed through that revolving door.

Now we know. The Wall Street Journal's Jeannette Neumann (following a report last month from the Sunlight Foundation) looked at the data, which has been available online since May. The results are quite stunning. Since Jan. 2006, Neumann reports, 82 Moody's analysts, 24 Fitch analysts, and 23 Standard & Poor's analysts have gone to work for companies they helped rate. To give you some sense of scale, the total number of analysts at Moody's today is 1,088; at Fitch, 712; and at Standard & Poor's it's 1,109. That works out to 7.5 percent, 3.4 percent, and 2.1 percent. Credit Suisse and Deutsche Bank have hired away the most analysts (seven apiece).

Moody's told the Journal that its numbers (and therefore the 7.5 percent figure) are actually wrong because it misunderstood the requirement and reported all employees who went to work for firms Moody's rated when it was supposed to report only those Moody's employees who went to work for firms they themselves helped rate. It's going to recalculate and post new numbers. Fitch didn't bother to upload its data to the Web, as required by law, until the Journal prodded it to (though it had provided the required data directly to the S.E.C. in December).

I'm a little stunned that any analysts are permitted, by law, to go to work for companies they helped rate. These data show that it's relatively commonplace.