What is 'Moody's'

Moody's Corporation is the holding company that owns both Moody's Investor Services, which rates fixed income debt securities and Moody's Analytics, which provides software and research for economic analysis and risk management. Moody's assigns ratings on the basis of assessed risk and the borrower's ability to make interest payments, and its ratings are closely watched by many investors.

BREAKING DOWN 'Moody's'

Investors worldwide pay close attention to the ratings that Moody's assigns to bonds, preferred stock and government entities. Moody's ratings go from AAA, which is the highest grade for the top quality issuer with the lowest risk down to C, which is usually given to securities that are in default with little chance of the principal being repaid.

Background

Moody's dates back to "Moody's Manual," which was first published in 1900; it provided general information and statistics about stocks and bonds. In 1909, "Moody's Analyses of Railroad Investments" added analytic information about debt instruments. Moody's Investor Services was established in 1914 and built on that foundation. It was bought by credit reporting company Dun & Bradstreet in 1962 but was spun off in 2000; it has been an independent company since.

In 1975, the U.S. Securities and Exchange Commission made Moody's a Nationally Recognized Statistical Rating Organization, along with Standard & Poor's and Fitch. Many institutions require a certain level of credit rating from an NRSRO entity in order to buy a given issue; the rating also impacts the capital requirements that the Securities and Exchange Commission applies to banks in the United States.

2008 Financial Crisis

Moody's, S&P, and Fitch have all been heavily criticized for their role in the financial market crisis of 2008. Much of the criticism centers around the AAA ratings that were given to mortgage-backed securities that in many cases were comprised of subprime loans. The ratings agencies' highly complex models failed to take into account the possibility of a broad nationwide decline in housing prices and how that would impact the performance of the bonds.

In 2007, as housing prices began a widespread decline, Moody's downgraded 83% of the mortgage securities that had been rated AAA just one year earlier. The prevalence of a system in which a bond's issuers pay the ratings company for their work has been blamed by some observers for inflated ratings. Moody's competitor S&P paid $1.5 billion to the Justice Department, 19 states and the District of Columbia to resolve allegations that it knowingly misled investors.

Moody's was criticized by many Europeans for aggressive sovereign ratings downgrades during the crisis, at a time when the U.S. government rating remained AAA despite budgetary problems.

Increased Oversight

The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was passed in the aftermath of the 2008 crisis, established the Office of Credit Ratings within the SEC; the commission was also given broad supervisory powers over the three NRSROs. The OCR is required to review the performance of the agencies on an annual basis and can fine or de-register them if necessary.

RELATED TERMS
  1. Moody's Bond Survey

    Moody's Bond Survey was a weekly publication reporting changes ...
  2. Moody's Analytics

    Moody’s Analytics offers tools, solutions and best practices ...
  3. Ba2/BB

    Ba2/BB are ratings by Moody's Investor Service and S&P Global ...
  4. Rating

    A rating is an assessment tool assigned by an analyst or rating ...
  5. Corporate Credit Rating

    A corporate credit rating is an opinion of an independent agency ...
  6. Notching

    Notching is the practice by rating agencies to give different ...
Related Articles
  1. Investing

    The Debt Ratings Debate

    Lack of competition and potential conflicts of interest have called the value of these ratings into question.
  2. Personal Finance

    A Brief History Of Credit Rating Agencies

    Credit rating agencies have a long history in the U.S. Learn about what they do and how were they developed.
  3. Investing

    The Junk Bond Outlook for 2016 (HYG,JNK,SJB)

    Junk bonds can be highly rewarding, but only in the right economic environment. Is this the right economic environment for junk bonds?
  4. Investing

    What Is A Corporate Credit Rating?

    Is the bond you're buying investment grade, or just junk? Find out how to check the score.
  5. Investing

    What’s Behind Moody’s Downgrade of Noble Group

    Moody's credit downgrade of Noble Group leaves a wide gap relative to Fitch ratings.
  6. Insights

    AT&T On Deck For Possible Downgrade

    AT&T has been penned for possible downgrade following its acquisition of Time Warner.
  7. Investing

    Moody's Reiterates Positive Outlook on Samsung

    Moody's reiterated its positive outlook on Samsung thanks to its strong showing in Q3.
  8. Investing

    The Eurozone Crisis And AAA Ratings

    The eurozone's healthier economies' exposure to weaker economies is threatening their coveted AAA ratings.
  9. Investing

    Global Luxury Retail Earnings to Double This Year: Moody’s

    But don't expect the double-digit levels achieved earlier this decade, says the ratings firm.
  10. Investing

    China Debt Pressure Mounts (YANG, YINN)

    Moody’s warns Chinese governments are facing pressure from national reforms, while Hong Kong and Shenzhen open doors for closer trade.
RELATED FAQS
  1. How do companies like Moody's rate bonds?

    Rating the creditworthiness of a bond issuer, despite the number crunching, is as much an art form as it is a science. While ... Read Answer >>
  2. What does investment grade mean?

    Investment grade refers to the quality of a company's credit rating, which is based upon their financial strength, future ... Read Answer >>
  3. How long are credit ratings valid?

    Learn how credit ratings are issued and how long they are valid. Investors look to credit ratings to determine risk associated ... Read Answer >>
  4. Are high-yield bonds better investments than low-yield bonds?

    It depends on the amount of default risk you as an investor want to be exposed to. More yield goes hand-in-hand with more ... Read Answer >>
  5. What do the letters / symbols on credit ratings mean?

    Learn about the numbers, letters and symbols used to express credit ratings and credit scores. Understand what these symbols ... Read Answer >>
Hot Definitions
  1. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  4. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  5. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  6. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
Trading Center