Some former Moody's analysts said they felt intimidated by bosses to assign rosy ratings to risky debt products, according to testimony to a government panel probing the causes of the financial crisis.

While there was never any explicit directive to lower credit standards, every missed deal had to be explained and defended, said Eric Kolchinsky, who once ran the Moody's unit that rated subprime collateralized debt obligations and has become a whistleblower against Moody's alleged faults.

Former derivatives vice president Mark Froeba said in his written testimony that management's compulsion to boost market share made it clear that investment bankers controlled analysts, encouraging them to award high ratings for debt that deserved worse.

Essentially, they used intimidation to create a docile population of analysts afraid to upset investment bankers and ready to cooperate to the maximum extent possible, said Froeba, who left Moody's after 10 years in 2007.

Moody's Corp, McGraw-Hill Cos' Standard & Poor's and Fimalac SA's Fitch Ratings have been widely faulted for fueling the financial crisis by assigning unreasonably high ratings for too long, and then downgrading them too fast.

Financial Crisis Inquiry Commission Chairman Phil Angelides opened Wednesday's hearing by criticizing Moody's Investors Service for bestowing thousands of high ratings on risky debt that later became unhinged.

To be blunt, the picture is not pretty, Angelides told the hearing in New York.

He called Moody's a 'triple-A' factory that expanded rapidly in structured finance, causing its stock to rise more than sixfold from 2000 to 2007. Investors who relied on Moody's ratings did not fare so well, he said.

Warren Buffett, whose company Berkshire Hathaway Inc is one of Moody's largest investors, is testifying later Wednesday. He received a subpoena to appear after initially resisting commission invitations.

The panel led by Angelides, a former California treasurer, has held several hearings featuring top finance officials including Goldman Sachs Group Inc Chief Executive Lloyd Blankfein. It is expected to issue its findings on what caused the crisis by December 15.

Buffett's testimony is of key interest, since he has long taken seemingly opposite sides of the argument in justifying his attitude toward rating agencies.

He has said he loves the business model, given that rating agencies have little competition and need virtually no capital, and get paid for ratings that issues must have. Yet he has said investors, like himself, should do their own credit homework and not depend on rating agencies to do it for them.

Buffett has used a similar argument to defend Goldman's marketing of securities that led to a U.S. Securities and Exchange Commission civil fraud lawsuit against the Wall Street bank in April.


Moody's Chief Executive Raymond McDaniel defended the company's business model of having issuers pay for ratings. He also sought to clarify that rating agencies are not gatekeepers that can stop securities from being issued.

Markets can and do grow without ratings, McDaniel said, citing the market for credit default swaps.

McDaniel got support from Brian Clarkson, a former Moody's president credited with the agency's expansion in structured finance before he unexpectedly left the company in 2008.

Calling the integrity of Moody's analysts beyond dispute, Clarkson suggested that the commission look to Wall Street itself, not the rating agencies, as a target for reform.

Mortgage brokers and underwriters are not required to register with any federal regulatory authority, he said. Uniform and meaningful standards for brokers and underwriters are something for this commission to consider.

Moody's in April handed over documents to the crisis commission in response to a subpoena. A month earlier, it had received a Wells notice indicating possible SEC civil charges, after it had failed to downgrade some European debt after learning a computer glitch caused inflated ratings.

McDaniel exercised some stock options the day the Wells notice was received, which the company has said resulted from participation in a prearranged plan. Berkshire also sold some Moody's stock shortly after the Wells notice was received.

(Reporting by Elinor Comlay, Kim Dixon and Jonathan Stempel; Editing by Tim Dobbyn)