Wow. These are some serious allegations that Eric Kolchinsky, a Moody's analyst, has made to the Wall Street Journal. Here is a link to the story on Huffington Post. Mr. Kolchinsky is prepared to testify in front of the House Committee on Oversight and Government Reform on Thursday that Moody's is still issuing artificial high ratings to complex debt securities.

Here is what Mr. Kolchinsky told WSJ:

Kolchinsky said Moody's "gave a high rating to a complicated debt security in January 2009 knowing that it was planning to downgrade assets that backed the securities. Within months, the securities were put on review for a downgrade.

"Moody's issued an opinion which was known to be wrong," Mr. Kolchinsky wrote in a July letter to the rating firm's chief compliance officer, a copy of which was reviewed by The Wall Street Journal. In the letter, Mr. Kolchinsky cited other instances in which he believes inflated ratings were given to securities.

That is FRAUD and "freedom of speech" can't protect against that. I can't wait to find out what securities Mr. Kolchinsky is referring to. Is it these great instruments issued by Morgan Stanley?

UPDATE: It looks like the European Union passed regulations of credit rating agencies back in April 2009. The EU regulations require:

• Credit rating agencies may not provide advisory services.
• They will not be allowed to rate financial instruments if they do not have sufficient quality information to base their ratings on.
• They must disclose the models, methodologies and key assumptions on which they base their ratings.
• They must differentiate the ratings of more complex products by adding a specific symbol.
• They will be obliged to publish an annual transparency report.
• They will have to create an internal function to review the quality of their ratings.
• They should have at least two independent directors on their boards whose remuneration cannot depend on the business performance of the rating agency. They will be appointed for a single term of office which can be no longer than five years. They can only be dismissed in case of professional misconduct. At least one of them should be an expert in securitisation and structured finance.

I think the last point is a corporate governance requirement for European corporations.