Moody’s Manual of Industrial and Miscellaneous Securities

It’s hard to flip through a newspaper these days without reading about what experts from Moody’s Investor Service have to say. Comments can be read regarding real estate markets, financial products, economic trends, the auto industry and more. A Moody’s independent financial advisor is skilled in assessing bond and stock info to come up with an industry portrait that strives to minimize risk for investors. Even though these ratings are not always perfect and investment money may be lost, this 100-year-old company is still considered one of the gold standards in risk assessment today.

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.”

In the past, Moody’s Investor Service has been accused of blackmail. German insurer Hannover Re claimed that a financial advisor at Moody’s offered him a “free rating,” which he politely declined. Following his refusal, Hannover’s debt was reduced to a “junk” rating and the company saw a swift 5 million loss in market value. Moody’s continued to issue free ratings to other companies surreptitiously but stood by claims that they were operating transparently. In July of 2008, the company admitted that some of its independent financial advisors had committed some serious errors and that disciplinary action was planned. “The integrity of our rating process is core to Moody’s values and is essential to the market,” Raymond McDaniel, the CEO of Moody’s, said in a written statement. “If an error occurs, it is crucial that rating committees consider possible rating changes and disclosures in an appropriate manner.”

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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