The lead analyst's recommendation is "the basis on which everything is turning" and is upheld about 80 percent of the time, said Hans van den Houten, a former Fitch and Moody's executive who also served as an outside recruiter for S&P until earlier this year.
That can sometimes tempt the lead analyst to let personal feelings influence the review of a client's finances. This happened to a former Moody's analyst rating a company at which one executive was a close friend from a previous job.
"I bent over backward to come up with the best result because I care for this person," said the analyst, who spoke on the condition that neither he nor the company he was rating be identified. Later, after the company's performance sagged, the analyst came to see that he had rated it too high.
If an analyst's feelings go the other way, it can cost a company money. Computer Associates International Inc., which has had recent run-ins with U.S. authorities about its accounting, earned a tough reputation for the way it deals with rating analysts. "They were definitely aggressive and abrasive and engendered a combative response from the rating agency," a former rating analyst said.
Computer Associates, which declined to comment, held a rating last year barely at investment -grade. Based on financials alone, it would likely have been higher, but its combative executives alienated some analysts. The company's rating ended up lower than expected, costing it potentially millions in extra interest payments. "Maybe a full notch is [due to] their personality," the former analyst said.
Analysts say it's reasonable to use their judgment to assess how well a company's executives make business decisions. But reservations about management will not necessarily show up in the rating firm's public report.
"You don't want to say you don't like these guys," another former rating official said. "You have nothing to point to, but it was discussed in the committee."
Moody's president, Raymond W. McDaniel Jr., declined to discuss specific cases. "The ratings process is produced by human beings, and human beings have views and emotions about certain things," he said, adding that Moody's tracks the quality of its ratings.
"We do not deny there are latent or inherent conflicts of interest in our business," McDaniel said. "The important thing is, how do we manage those conflicts?"
Credit raters say that other industries, including newspapers, have to cope with similar conflicts. "Our practice is no different from The Washington Post who will run ads from Ford, AT&T, Merrill Lynch or dozens of other companies while at the same time reporting on them every day," Fitch said in a written response to questions.
Some rating companies cited a 2003 study by two economists who work for the Federal Reserve who found "no evidence" that ratings are affected by conflicts of interest, but rather that credit raters "appear to be relatively responsive to reputation concerns and so protect the interests of investors."