It sounds like by trying to escape negatives in the community space, the moderator space was filled to the brim with them. A little negative in the community helps keep everything balanced.
Re picking new moderators we use a simple method: some people start being good moderators before they are officially moderators. They help new members, remind people of forum policy, flag concerning posts and leave helpful comments with the flags, etc. We just watch those people and have a little discussion on who to promote to an actual moderator.