Moody’s Investor Service has been the leading source of credit ratings, risk analysis and economic research for 100 years. Founder John Moody began his enterprise in 1900 as a publication containing statistics and information on financial stocks and bonds. Later, he adapted to extend his advisory services to businesses, offering industry analysis aimed at minimizing investment risk. During the Great Depression, Moody’s really established itself as a reliable source when bond default rates went up but Moody’s highest-rated bonds made all their payments. During the seventies, the Moody’s business model changed slightly again, offering ratings at a price. The idea was that calling in an objective rating service would reflect favorably upon businesses.
In this unruly sea of financial transactions and market uncertainties, Americans look to an investing service like Moody’s for guidance. With over 1,000 independent financial advisors, Moody’s represents a large body of professional economic experts. In their latest prediction, the financial market will continue to suffer throughout 2010. This month, Moody’s VP Craig Emrick stated, “We do not believe asset quality deterioration for the U.S. banking industry has reached its peak, and we therefore anticipate multiple quarters of losses for a large number of rated banks.” He added that 44% of the banks they rated showed net losses this year, but some residential real estate transactions have “caught up and surpassed [expectations] by some measures.”
Of course not all advisory services are right 100% of the time and investors do lose money on AAA rated financial products — sometimes a lot of money. More than one investor has appealed to district judges, complaining that they were misled by “deceptive ratings.” In the past, Moody’s has countered this argument that their opinions and investment advice are protected by First Amendment/Free Speech rights. On September 2nd, in a landmark decision, U.S. District Judge Shira Scheindlin rejected these First Amendment claims and ruled that investors are allowed to sue these companies. “It reminds me of when the courts finally ruled a tobacco victim could sue a cigarette company,” said David Einhorn, 40, a hedge fund manager who is betting against Moody’s Investor Service. “The damage in this case is large, relative to the ability to pay.” Even so, Moody’s spokespeople said they are “confident” that this judgment will turn out well.
Moody’s Investor Service does not have an entirely clean slate, however. One of the problems, NY Times writer David Gillen points out, is that “Dominant agencies like Moody’s and Standard & Poor’s are paid by the companies whose securities they are evaluating. Under this so-called issuer-pay model, the industry maximized its profits at investors’ expense, and, in the process, imperiled the entire financial system” (6/4/09). In the future, we are likely to see a shift in advisory services to improve the legitimacy of the ratings to a more unbiased system.
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