Moody's Investors Service, often referred to as Moody's, is the
bond credit rating
In investment, the bond credit rating represents the credit worthiness of corporate or government bonds. It is not the same as an individual's credit score. The ratings are published by credit rating agencies and used by investment professionals ...
business of
Moody's Corporation
Moody's Corporation, often referred to as Moody's, is an American business and financial services company. It is the holding company for Moody's Investors Service (MIS), an American credit rating agency, and Moody's Analytics (MA), an American p ...
, representing the company's traditional line of business and its historical name. Moody's Investors Service provides international financial research on
bonds issued by commercial and government entities. Moody's, along with
Standard & Poor's
S&P Global Ratings (previously Standard & Poor's and informally known as S&P) is an American credit rating agency (CRA) and a division of S&P Global that publishes financial research and analysis on stocks, bonds, and commodities. S&P is con ...
and
Fitch Group
Fitch Ratings Inc. is an American credit rating agency and is one of the " Big Three credit rating agencies", the other two being Moody's and Standard & Poor's. It is one of the three nationally recognized statistical rating organizations (NRSRO) ...
, is considered one of the
Big Three credit rating agencies. It is also included in the
Fortune 500
The ''Fortune'' 500 is an annual list compiled and published by ''Fortune'' magazine that ranks 500 of the largest United States corporations by total revenue for their respective fiscal years. The list includes publicly held companies, along ...
list of 2021.
The company ranks the
creditworthiness
A credit risk is risk of default on a debt that may arise from a borrower failing to make required payments. In the first resort, the risk is that of the lender and includes lost principal and interest, disruption to cash flows, and increased c ...
of borrowers using a standardized ratings scale which measures expected investor loss in the event of
default. Moody's Investors Service rates
debt securities
A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any fo ...
in several
bond market
The bond market (also debt market or credit market) is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market. This is usually in the form of bonds, b ...
segments. These include
government
A government is the system or group of people governing an organized community, generally a state.
In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary. Government is a ...
,
municipal
A municipality is usually a single administrative division having corporate status and powers of self-government or jurisdiction as granted by national and regional laws to which it is subordinate.
The term ''municipality'' may also mean the go ...
and
corporate bond
A corporate bond is a bond issued by a corporation in order to raise financing for a variety of reasons such as to ongoing operations, M&A, or to expand business. The term is usually applied to longer-term debt instruments, with maturity of ...
s; managed investments such as
money market fund
A money market fund (also called a money market mutual fund) is an open-ended mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper. Money market funds are managed with the goal of maintaining a hi ...
s and fixed-income funds; financial institutions including banks and non-bank finance companies; and asset classes in
structured finance
Structured finance is a sector of finance - specifically financial law - that manages leverage and risk. Strategies may involve legal and corporate restructuring, off balance sheet accounting, or the use of financial instruments.
Securitization ...
.
In Moody's Investors Service's ratings system, securities are assigned a rating from Aaa to C, with Aaa being the highest quality and C the lowest quality.
Moody's was founded by
John Moody in 1909 to produce manuals of statistics related to stocks and bonds and bond ratings. In 1975, the company was identified as a
Nationally Recognized Statistical Rating Organization
A nationally recognized statistical rating organization (NRSRO) is a credit rating agency (CRA) approved by the U.S. Securities and Exchange Commission (SEC) to provide information that financial firms must rely on for certain regulatory purpos ...
(NRSRO) by the
U.S. Securities and Exchange Commission
The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...
. Following several decades of ownership by
Dun & Bradstreet
The Dun & Bradstreet Corporation is an American company that provides commercial data, analytics, and insights for businesses. Headquartered in Jacksonville, Florida, the company offers a wide range of products and services for risk and financia ...
, Moody's Investors Service became a separate company in 2000. Moody's Corporation was established as a holding company.
Role in capital markets
Together, they are sometimes referred to as the
Big Three credit rating agencies. While credit rating agencies are sometimes viewed as interchangeable, Moody's, S&P and Fitch in fact rate bonds differently; for example, S&P and
Fitch Ratings
Fitch Ratings Inc. is an American credit rating agency and is one of the " Big Three credit rating agencies", the other two being Moody's and Standard & Poor's. It is one of the three nationally recognized statistical rating organizations (NRSRO) ...
measure the probability that a security will default, while Moody's ratings seek to measure the expected losses in the event of a default.
All three operate worldwide, maintaining offices on six continents, and rating tens of trillions of dollars in securities. However, only
Moody's Corporation
Moody's Corporation, often referred to as Moody's, is an American business and financial services company. It is the holding company for Moody's Investors Service (MIS), an American credit rating agency, and Moody's Analytics (MA), an American p ...
is a free-standing company.
Moody's Investors Service and its close competitors play a key role in global
capital market
A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital markets channel the wealth of savers t ...
s as three supplementary credit analysis provider for banks and other financial institutions in assessing the credit risk of particular securities. This form of third party analysis is particularly useful for smaller and less sophisticated investors, as well as for all investors to use as an external comparison for their own judgments.
Credit rating agencies also play an important role in the laws and regulations of the United States and several other countries, such as those of the
European Union
The European Union (EU) is a supranational political and economic union of member states that are located primarily in Europe. The union has a total area of and an estimated total population of about 447million. The EU has often been des ...
. In the United States their credit ratings are used in regulation by the
U.S. Securities and Exchange Commission
The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...
as
Nationally Recognized Statistical Rating Organization
A nationally recognized statistical rating organization (NRSRO) is a credit rating agency (CRA) approved by the U.S. Securities and Exchange Commission (SEC) to provide information that financial firms must rely on for certain regulatory purpos ...
s (NRSROs) for a variety of regulatory purposes.
Among the effects of regulatory use was to enable lower-rated companies to sell bond debt for the first time; their lower ratings merely distinguished them from higher-rated companies, rather than excluding them altogether, as had been the case.
However, another aspect of mechanical use of ratings by regulatory agencies has been to reinforce "pro-cyclical" and "cliff effects" of downgrades. In October 2010, the
Financial Stability Board
The Financial Stability Board (FSB) is an international body that monitors and makes recommendations about the global financial system. It was established after the G20 London summit in April 2009 as a successor to the Financial Stability Forum ...
(FSB) created a set of "principles to reduce reliance" on credit rating agencies in the laws, regulations and market practices of
G-20 member countries.
Since the early 1990s, the SEC has also used NRSRO ratings in measuring the
commercial paper
Commercial paper, in the global financial market, is an unsecured promissory note with a fixed maturity of rarely more than 270 days. In layperson terms, it is like an " IOU" but can be bought and sold because its buyers and sellers have some ...
held by
money market fund
A money market fund (also called a money market mutual fund) is an open-ended mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper. Money market funds are managed with the goal of maintaining a hi ...
s.
The SEC has designated seven other firms as NRSROs, including, for example,
A. M. Best
AM Best is an American credit rating agency headquartered in Oldwick, New Jersey, that focuses on the insurance industry. Both the U.S. Securities and Exchange Commission and the National Association of Insurance Commissioners have designate ...
, which focuses on obligations of
insurance companies
Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...
. Companies with which Moody's competes in specific areas include investment research company
Morningstar, Inc.
Morningstar, Inc. is an American financial services firm headquartered in Chicago, Illinois and was founded by Joe Mansueto in 1984. It provides an array of investment research and investment management services.
With operations in 29 countries, ...
and publishers of financial information for investors such as
Thomson Reuters
Thomson Reuters Corporation ( ) is a Canadian multinational media conglomerate. The company was founded in Toronto, Ontario, Canada, where it is headquartered at the Bay Adelaide Centre.
Thomson Reuters was created by the Thomson Corpora ...
and
Bloomberg L.P.
Bloomberg L.P. is a privately held financial, software, data, and media company headquartered in Midtown Manhattan, New York City. It was co-founded by Michael Bloomberg in 1981, with Thomas Secunda, Duncan MacMillan (Bloomberg), Duncan MacMi ...
Especially since the early 2000s, Moody's frequently makes its analysts available to journalists, and issues regular public statements on credit conditions.
Moody's, like S&P, organizes public seminars to educate first-time securities issuers on the information it uses to analyze debt securities.
Moody's purchased a controlling share in the "
climate risk
Climate risk refers to risk assessments based on formal analysis of the consequences, likelihoods and responses to the impacts of climate change and how societal constraints shape adaptation options. Common approaches to risk assessment and risk ...
data firm" Four Twenty Seven in 2019.
Moody's credit ratings
According to Moody's, the purpose of its ratings is to "provide investors with a simple system of gradation by which future relative creditworthiness of securities may be gauged". To each of its ratings from Aa through Caa, Moody's appends numerical modifiers 1, 2 and 3; the lower the number, the higher-end the rating. Aaa, Ca and C are not modified this way. As Moody's explains, its ratings are "not to be construed as recommendations", nor are they intended to be a sole basis for investment decisions. In addition, its ratings don't speak to market price, although market conditions may impact credit risk.
History of Moody's
Founding and early history
Moody's traces its history back to two publishing companies established by
John Moody, the inventor of modern
bond credit rating
In investment, the bond credit rating represents the credit worthiness of corporate or government bonds. It is not the same as an individual's credit score. The ratings are published by credit rating agencies and used by investment professionals ...
s. In 1900, Moody published his first market assessment, called ''Moody's Manual of Industrial and Miscellaneous Securities'', and established John Moody & Company.
The publication provided detailed statistics relating to stocks and bonds of financial institutions, government agencies, manufacturing, mining, utilities, and food companies. It experienced early success, selling out its first print run in its first two months. By 1903, ''
Moody's Manual
''Moody's Manual'' is a series of manuals published by the Moody's Corporation. It was first published in 1900 by John Moody, nine years before he founded Moody's. Initially called ''Moody's Manual of Industrial and Miscellaneous Securities'', ...
'' was a nationally recognized publication.
Moody was forced to sell his business, due to a shortage of capital, when the
1907 financial crisis fueled several changes in the markets.
Moody returned in 1909 with a new publication focused solely on railroad bonds, ''Analysis of Railroad Investments'',
and a new company, Moody's Analyses Publishing Company.
While Moody acknowledged that the concept of bond ratings "was not entirely original" with him—he credited early bond rating efforts in Vienna and Berlin as inspiration—he was the first to publish them widely, in an accessible format.
Moody was also the first to charge subscription fees to investors.
In 1913 he expanded the manual's focus to include industrial firms and utilities; the new ''Moody's Manual'' offered ratings of public securities, indicated by a letter-rating system borrowed from mercantile credit-reporting firms. The following year, Moody incorporated the company as Moody's Investors Service.
Other rating companies followed over the next few years, including the antecedents of the "
Big Three" credit rating agencies: Poor's in 1916, Standard Statistics Company in 1922,
and the Fitch Publishing Company in 1924.
Moody's expanded its focus to include ratings for U.S. state and local government bonds in 1919
and, by 1924, Moody's rated nearly the entire U.S. bond market.
1930s to mid-century
The relationship between the U.S. bond market and rating agencies developed further in the 1930s. As the market grew beyond that of traditional investment banking institutions, new investors again called for increased transparency, leading to the passage of new, mandatory disclosure laws for issuers, and the creation of the
Securities and Exchange Commission
The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...
(SEC).
In 1936 a new set of laws were introduced, prohibiting banks from investing in "speculative investment securities" ("junk bonds", in modern terminology) as determined by "recognized rating manuals". Banks were permitted only to hold "investment grade" bonds, following the judgment of Moody's, along with Standard, Poor's and Fitch. In the decades that followed, state insurance regulators approved similar requirements.
In 1962, Moody's Investors Service was bought by
Dun & Bradstreet
The Dun & Bradstreet Corporation is an American company that provides commercial data, analytics, and insights for businesses. Headquartered in Jacksonville, Florida, the company offers a wide range of products and services for risk and financia ...
, a firm engaged in the related field of
credit reporting
A credit score is a numerical expression based on a level analysis of a person's credit files, to represent the creditworthiness of an individual. A credit score is primarily based on a credit report, information typically sourced from credit bu ...
, although they continued to operate largely as independent companies.
1970s to 2000
In the late 1960s and 1970s,
commercial paper
Commercial paper, in the global financial market, is an unsecured promissory note with a fixed maturity of rarely more than 270 days. In layperson terms, it is like an " IOU" but can be bought and sold because its buyers and sellers have some ...
and
bank deposit
A deposit account is a bank account maintained by a financial institution in which a customer can deposit and withdraw money. Deposit accounts can be savings accounts, current accounts or any of several other types of accounts explained below.
...
s began to be rated. As well, the major agencies began charging the issuers of bonds as well as investors — Moody's began doing this in 1970
— thanks in part to a growing
free rider problem
In the social sciences, the free-rider problem is a type of market failure that occurs when those who benefit from resources, public goods (such as public roads or public library), or services of a communal nature do not pay for them or under-p ...
related to the increasing availability of inexpensive
photocopy machines,
and the increased complexity of the financial markets.
Rating agencies also grew in size as the number of issuers grew,
both in the United States and abroad, making the credit rating business significantly more profitable. In 2005 Moody's estimated that 90% of
credit rating agency
A credit rating agency (CRA, also called a ratings service) is a company that assigns credit ratings, which rate a debtor's ability to pay back debt by making timely principal and interest payments and the likelihood of default. An agency may ra ...
revenues came from issuer fees.
The end of the
Bretton Woods system
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the United States, Canada, Western European countries, Australia, and Japan after the 1944 Bretton Woods Agreement. The Bretto ...
in 1971 led to the liberalization of financial regulations, and the global expansion of capital markets in the 1970s and 1980s.
In 1975, the SEC changed its minimum capital requirements for
broker-dealer
In financial services, a broker-dealer is a natural person, company or other organization that engages in the business of trading securities for its own account or on behalf of its customers. Broker-dealers are at the heart of the securities and d ...
s, using bond ratings as a measurement. Moody's and nine other agencies (later five, due to consolidation) were identified by the SEC as "nationally recognized statistical ratings organizations" (NRSROs) for broker-dealers to use in meeting these requirements.
The 1980s and beyond saw the global capital market expand; Moody's opened its first overseas offices in Japan in 1985, followed by offices in the United Kingdom in 1986, France in 1988, Germany in 1991, Hong Kong in 1994, India in 1998 and China in 2001.
The number of bonds rated by Moody's and the Big Three agencies grew substantially as well. As of 1997, Moody's was rating about $5 trillion in securities from 20,000 U.S. and 1,200 non-U.S. issuers.
The 1990s and 2000s were also a time of increased scrutiny, as Moody's was sued by unhappy issuers and investigation by the
U.S. Department of Justice
The United States Department of Justice (DOJ), also known as the Justice Department, is a federal executive department of the United States government tasked with the enforcement of federal law and administration of justice in the United State ...
,
as well as criticism following the
collapse of Enron, the U.S.
subprime mortgage crisis
The United States subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010 that contributed to the Financial crisis of 2007–2008, 2007–2008 global financial crisis. It was triggered by a large decline ...
and subsequent
late-2000s financial crisis.
In 1998, Dun & Bradstreet sold the Moody's publishing business to Financial Communications (later renamed
Mergent
FTSE Russell is a subsidiary of London Stock Exchange Group (LSEG) that produces, maintains, licenses, and markets stock market indices. The division is notable for FTSE 100 Index, Russell 2000 Index, among other indices.
The brand and division ...
). Following several years of rumors and pressure from institutional shareholders,
in December 1999 Moody's parent Dun & Bradstreet announced it would spin off Moody's Investors Service into a separate
publicly traded company
A public company is a company whose ownership is organized via shares of stock which are intended to be freely traded on a stock exchange or in over-the-counter markets. A public (publicly traded) company can be listed on a stock exchange (l ...
. Although Moody's had fewer than 1,500 employees in its division, it represented about 51% of Dun & Bradstreet profits in the year before the announcement.
The spin-off was completed on September 30, 2000,
and, in the half decade that followed, the value of Moody's shares improved by more than 300%.
Structured finance boom and after
Structured finance went from 28% of Moody's revenue in 1998 to almost 50% in 2007, and "accounted for pretty much all of Moody's growth" during that time. According to the
Financial Crisis Inquiry Report, during the years 2005, 2006, and 2007, rating of structured finance products such as
mortgage-backed securities
A mortgage-backed security (MBS) is a type of asset-backed security (an 'instrument') which is secured by a mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of individuals (a government agency or investment ba ...
made up close to half of Moody's rating revenues. From 2000 to 2007, revenues from rating structured financial instruments increased more than fourfold.
[Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States]
p.118 However, there was some question about the models Moody's used to give structured products high ratings. In June 2005, shortly before the subprime mortgage crisis, Moody's updated its approach for estimating default correlation of non-prime/nontraditional mortgages involved in structured financial products like
mortgage-backed securities
A mortgage-backed security (MBS) is a type of asset-backed security (an 'instrument') which is secured by a mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of individuals (a government agency or investment ba ...
and
Collateralized debt obligation
A collateralized debt obligation (CDO) is a type of structured asset-backed security (ABS). Originally developed as instruments for the corporate debt markets, after 2002 CDOs became vehicles for refinancing mortgage-backed securities (MBS).Lepke ...
s. Its new model was based on trends from the previous 20 years, during which time housing prices had been rising, mortgage delinquencies very low, and nontraditional mortgage products a very small niche of the market.
On July 10, 2007, in "an unprecedented move", Moody's downgraded 399 subprime mortgage-backed securities that had been issued the year before. Three months later, it downgraded another 2506
tranche
In structured finance, a tranche is one of a number of related securities offered as part of the same transaction. In the financial sense of the word, each bond is a different slice of the deal's risk. Transaction documentation (see indenture) u ...
s ($33.4 billion). By the end of the crisis, Moody's downgraded 83% of all the 2006 Aaa mortgage backed security tranches and all of the Baa tranches.
In June 2013, Moody's Investor Service has warned that Thailand's credit rating may be damaged due to an increasingly costly rice-pledging scheme which lost 200 billion baht ($6.5 billion) in 2011–2012.
Controversies
Sovereign downgrades
Moody's, along with the other major credit rating agencies, is often the subject of criticism from countries whose public debt is downgraded, generally claiming increased cost of borrowing as a result of the downgrade. Examples of sovereign debt downgrades that attracted significant media attention at the time include Australia in the 1980s, Canada and Japan in the 1990s, Thailand during the
1997 Asian financial crisis
The Asian financial crisis was a period of financial crisis that gripped much of East Asia and Southeast Asia beginning in July 1997 and raised fears of a worldwide economic meltdown due to financial contagion. However, the recovery in 1998–1 ...
,
and Portugal in 2011 following the
European sovereign debt crisis
The European debt crisis, often also referred to as the eurozone crisis or the European sovereign debt crisis, is a multi-year debt crisis that took place in the European Union (EU) from 2009 until the mid to late 2010s. Several eurozone membe ...
.
Unsolicited ratings
Moody's has occasionally faced litigation from entities whose bonds it has rated on an unsolicited basis, and investigations concerning such unsolicited ratings. In October 1995, the school district of
Jefferson County, Colorado
Jefferson County is a county located in the U.S. state of Colorado. As of the 2020 census, the population was 582,910, making it the fourth-most populous county in Colorado. The county seat is Golden, and the most populous city is Lakewood.
...
sued Moody's, claiming the unsolicited assignment of a "negative outlook" to a 1993 bond issue was based on Jefferson County having selected S&P and Fitch to do its rating. Moody's rating raised the issuing cost to Jefferson County by $769,000. Moody's argued that its assessment was "opinion" and therefore constitutionally protected; the court agreed, and the decision was upheld on appeal.
In the mid-1990s, the
U.S. Justice Department
The United States Department of Justice (DOJ), also known as the Justice Department, is a federal executive department of the United States government tasked with the enforcement of federal law and administration of justice in the United States ...
's antitrust division opened an investigation to determine whether unsolicited ratings amounted to an illegal exercise of
market power
In economics, market power refers to the ability of a firm to influence the price at which it sells a product or service by manipulating either the supply or demand of the product or service to increase economic profit. In other words, market powe ...
,
however the investigation was closed with no antitrust charges filed. Moody's has pointed out that it has assigned unsolicited ratings since 1909, and that such ratings are the market's "best defense against rating shopping" by issuers. In November 1999, Moody's announced it would begin identifying which ratings were unsolicited as part of a general move toward greater transparency.
The agency faced a similar complaint in the mid-2000s from
Hannover Re
Hannover Re (in German ''Hannover Rück'') is a reinsurance company based in Hannover, Germany. It is the third-largest reinsurance group in the world, with a gross premium of around €
The euro sign () is the currency sign used for the euro ...
, a German insurer that lost $175 million in market value when its bonds were lowered to "junk" status.
In 2005, unsolicited ratings were at the center of a subpoena by the
New York Attorney General
The attorney general of New York is the chief legal officer of the U.S. state of New York and head of the Department of Law of the state government. The office has been in existence in some form since 1626, under the Dutch colonial government of ...
's office under
Eliot Spitzer
Eliot Laurence Spitzer (born June 10, 1959) is an American politician and attorney. A member of the Democratic Party (United States), Democratic Party, he was the 54th governor of New York from 2007 until his resignation in 2008.
Spitzer was b ...
, but again no charges were filed.
Following the 2008 financial crisis, the SEC adopted new rules for the rating agency industry, including one to encourage unsolicited ratings. The intent of the rule is to counteract potential conflicts of interest in the issuer-pays model by ensuring a "broader range of views on the creditworthiness" of a security or instrument.
Alleged conflicts of interest
The "issuer pays" business model adopted in the 1970s by Moody's and other rating agencies has been criticized for creating a possible
conflict of interest
A conflict of interest (COI) is a situation in which a person or organization is involved in multiple interests, financial or otherwise, and serving one interest could involve working against another. Typically, this relates to situations i ...
, supposing that rating agencies may artificially boost the rating of a given security in order to please the issuer.
The SEC recently acknowledged, however, in its September 30, 2011 summary report of its mandatory annual examination of NRSROs that the subscriber-pays model under which Moody's operated prior to adopting the issuer pays model also "presents certain conflicts of interest inherent in the fact that subscribers, on whom the NRSRO relies, have an interest in ratings actions and could exert pressure on the NRSRO for certain outcomes". Other alleged conflicts of interest, also the subject of a Department of Justice investigation the mid-1990s, raised the question of whether Moody's pressured issuers to use its consulting services upon threat of a lower bond rating.
Moody's has maintained that its reputation in the market is the balancing factor, and a 2003 study, covering 1997 to 2002, suggested that "reputation effects" outweighed conflicts of interest. Thomas McGuire, a former executive vice president, said in 1995 that: "
at's driving us is primarily the issue of preserving our track record. That's our bread and butter".
In March 2021, Moody's reached a settlement with the European Union regarding alleged conflicts of interest. Moody's was fined 3.7 million euros ($4.35 million).
Financial crisis of 2007–2008
The
global financial crisis
Global means of or referring to a globe and may also refer to:
Entertainment
* ''Global'' (Paul van Dyk album), 2003
* ''Global'' (Bunji Garlin album), 2007
* ''Global'' (Humanoid album), 1989
* ''Global'' (Todd Rundgren album), 2015
* Bruno ...
of the late 2000s brought increased scrutiny to credit rating agencies' assessments of complex
structured finance
Structured finance is a sector of finance - specifically financial law - that manages leverage and risk. Strategies may involve legal and corporate restructuring, off balance sheet accounting, or the use of financial instruments.
Securitization ...
securities. Moody's and its close competitors were subject to criticism following large downgrade actions beginning in July 2007.
According to the ''Financial Crisis Inquiry Report,'' 73% of the mortgage-backed securities Moody's had rated triple-A in 2006 were downgraded to junk by 2010.
In its "Conclusions on Chapter 8", the Financial Crisis Inquiry Commission stated: "There was a clear failure of corporate governance at Moody's, which did not ensure the quality of its ratings on tens of thousands of mortgage-backed securities and CDOs."
Faced with having to put more capital against lower rated securities, investors such as banks, pension funds and insurance companies sought to sell their
residential mortgage-backed securities (RMBS) and
collateralized debt obligation
A collateralized debt obligation (CDO) is a type of structured asset-backed security (ABS). Originally developed as instruments for the corporate debt markets, after 2002 CDOs became vehicles for refinancing mortgage-backed securities (MBS).Lepke ...
(CDO) holdings.
The value of these securities held by financial firms declined, and the market for new subprime securitizations dried up.
Some academics and industry observers have argued that the rating agencies' mass downgrades were part of the "
perfect storm
A perfect storm is a meteorological event aggravated by a rare combination of circumstances. The term is used by analogy to an unusually severe storm that results from a rare combination of meteorological phenomena.
Origin
The Oxford English Dic ...
" of events leading up to the financial crisis in 2008.
In 2008, a study group established by the Committee on the Global Financial System (CGFS), a committee of the
Bank for International Settlements
The Bank for International Settlements (BIS) is an international financial institution owned by central banks that "fosters international monetary and financial cooperation and serves as a bank for central banks".
The BIS carries out its work thr ...
, found that rating agencies had underestimated the severity of the
subprime mortgage crisis
The United States subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010 that contributed to the Financial crisis of 2007–2008, 2007–2008 global financial crisis. It was triggered by a large decline ...
, as had "many market participants". According to the CGFS, significant contributing factors included "limited historical data" and an underestimation of "originator risk" factors. The CGFS also found that agency ratings should "support, not replace, investor due diligence" and that agencies should provide "better information on the key risk factors" of structured finance ratings. In October 2007, Moody's further refined its criteria for originators, "with loss expectations increasing significantly from the highest to the lowest tier". In May 2008, Moody's proposed adding "volatility scores and loss sensitivities" to its existing rankings.
Although the rating agencies were criticized for "technical failings and inadequate resources", the FSB stated that the agencies' "need to repair their reputation was seen as a powerful force" for change.
Moody's has in fact lost market share in certain sectors due to its tightened rating standards on some asset-backed securities, for example the
commercial mortgage-backed securities
Commercial mortgage-backed securities (CMBS) are a type of mortgage-backed security backed by commercial and multifamily mortgages rather than residential real estate. CMBS tend to be more complex and volatile than residential mortgage-backed ...
(CMBS) market in 2007.
In April 2013, Moody's, along with
Standard & Poor's
S&P Global Ratings (previously Standard & Poor's and informally known as S&P) is an American credit rating agency (CRA) and a division of S&P Global that publishes financial research and analysis on stocks, bonds, and commodities. S&P is con ...
and
Morgan Stanley
Morgan Stanley is an American multinational investment management and financial services company headquartered at 1585 Broadway in Midtown Manhattan, New York City. With offices in more than 41 countries and more than 75,000 employees, the fir ...
, settled fourteen lawsuits filed by groups including
Abu Dhabi Commercial Bank
Abu Dhabi Commercial Bank PJSC ( ar, بنك أبوظبي التجاري) (), commonly called ADCB, is a bank in the United Arab Emirates.
Abu Dhabi Commercial Bank (ADCB) was formed in 1985 as a public shareholding company with limited liability, ...
and
King County, Washington
King County is located in the U.S. state of Washington. The population was 2,269,675 in the 2020 census, making it the most populous county in Washington, and the 13th-most populous in the United States. The county seat is Seattle, also the st ...
. The lawsuits alleged that the agencies inflated their ratings on purchased structured investment vehicles.
In January 2017, Moody's agreed to pay nearly $864 million to settle with the Department of Justice, other state authorities and Washington. A fine of $437.5 million would be paid to the
DOJ, and the remaining $426.3 million penalty would be split among 21 states and the
District of Columbia
)
, image_skyline =
, image_caption = Clockwise from top left: the Washington Monument and Lincoln Memorial on the National Mall, United States Capitol, Logan Circle, Jefferson Memorial, White House, Adams Morgan, ...
. Then California Attorney General Kamala Harris and then Missouri Attorney General Joshua Hawley were among the state signatories to the settlement.
Global Credit Research
In March 2013 Moody's Investors Service published their report entitled ''Cash Pile Grows 10% to $1.45 Trillion; Overseas Holdings Continue to Expand'' in their Global Credit Research series, in which they examined companies they rate in the US non-financial corporate sector (NFCS). According to their report, by the end of 2012 the US NFCS held "$1.45 trillion in cash", 10% more than in 2011. At the end of 2011, US NFCS held $1.32 trillion in cash which was already a record level.
"Of the $1.32 trillion for all the rated companies, Moody's estimates that $840 billion, or 58% of the total cash, is held overseas."
See also
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Capital IQ
S&P Global Inc. (prior to April 2016 McGraw Hill Financial, Inc., and prior to 2013 The McGraw–Hill Companies, Inc.) is an American publicly traded corporation headquartered in Manhattan, New York City. Its primary areas of business are financi ...
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Compustat
Compustat is a database of financial, statistical, and market information on active and inactive global companies throughout the world. The service began in 1962.
This database provides products directed at institutional investors, universities, ...
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CRISIL
CRISIL (formerly ''Credit Rating Information Services of India Limited'') is an Indian analytical company providing ratings, research, and risk and policy advisory services and is a subsidiary of American company S&P Global.
CRISIL, was the f ...
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ICRA Limited
ICRA Limited (ICRA) is an Indian independent and professional investment information and credit rating agency. The company was established in 1991, and was originally named ''Investment Information and Credit Rating Agency of India Limited'' (I ...
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Dominion Bond Rating Service
DBRS Morningstar is a global credit rating agency (CRA) founded in 1976 (originally known as Dominion Bond Rating Service in Toronto). DBRS was acquired by the global financial services firm Morningstar, Inc. in 2019 for approximately $700 milli ...
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Dagong Europe Credit Rating
Dagong Europe Credit Rating is a subsidiary of Chinese state-owned credit rating agency Dagong Global Credit Rating. It was established in March 2012 with headquarters in Milan, Italy. In June 2013, it was registered and received authorization f ...
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Dagong Global Credit Rating
Dagong Global Credit Rating () is a state-owned credit rating agency based in China.
History
The company was established in 1994, following approval by the People's Bank of China and the State Economic and Trade Division of the People's Republ ...
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Global Industry Classification Standard
The Global Industry Classification Standard (GICS) is an industry taxonomy developed in 1999 by MSCI and Standard & Poor's (S&P) for use by the global financial community. The GICS structure consists of 11 sectors, 24 industry groups, 69 industrie ...
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Leveraged Commentary & Data
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List of countries by credit rating
This is a list of countries by credit rating, showing long-term foreign currency credit ratings for sovereign bonds as reported by the largest three major credit rating agencies: Standard & Poor's, Fitch, and Moody's. The list also includes all ...
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Moody's Aaa Bond
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Moody's Analytics
Moody's Analytics is a subsidiary of Moody's Corporation established in 2007 to focus on non-rating activities, separate from Moody's Investors Service. It provides economic research regarding risk, performance and financial modeling, as well as ...
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Reuters
Reuters ( ) is a news agency owned by Thomson Reuters Corporation. It employs around 2,500 journalists and 600 photojournalists in about 200 locations worldwide. Reuters is one of the largest news agencies in the world.
The agency was estab ...
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Spread Research Spread Research SAS is a French credit rating agency and independent credit research company.
The company was founded in 2004 and in 2013 became the first French credit rating agency to be authorised. The company is based in Lyon, France, and has ...
References
External links
Moody's
{{Authority control
Financial services companies established in 1909
Credit rating agencies
Multinational companies
Financial services companies based in New York City
1909 in economics
1909 establishments in New York City