Moody’s Investor Service
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 is not without controversy. In lieu of the financial crisis, credit rating agencies like Moody’s and Standard & Poor’s have been accused of assigning top tier “AAA” ratings to bogus investments and stock products that were backed by subprime mortgages and other bad debt. Their ABS Collateralized Debt Obligations sector, for instance, lost $125 million, despite having the best ratings. However, as NY Times writer David Gillen wrote in a June 4, 2009 article, old methodologies die hard. “Even now, it is difficult — in fact, impossible — for big investors to ignore credit ratings completely,” he writes. “By law, banks and insurance companies must take ratings into account when investing in bonds. Big money managers, and their customers, often base investment guidelines on them.”
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