What Is Moody's?

Moody's Corporation (MCO) is the holding company that owns both Moody's Investors Service, 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.

Key Takeaways

  • Moody's Corporation is an American financial services company that acts as the holding company for Moody's Investors Service and Moody's Analytics.
  • Moody's Investors Service provides investors with credit ratings, risk analysis, and research for stocks, bonds, and government entities.
  • Moody's Analytics develops software and tools to help capital markets with risk management, credit analysis, and economic research.
  • Through its rating system, Moody's assigns grades to bonds and stocks based on the risk associated with the investment.
  • During the 2008 financial crisis, Moody's and other credit rating agencies were criticized for giving "AAA" ratings to mortgage-backed securities that in many cases were comprised of subprime loans.

Understanding 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 for recovery of principal or interest.

Moody's History

Moody's Corporation dates back to Moody's Manual of Industrial and Miscellaneous Securities, which was first published by company founder John Moody in 1900. The manual provided general information and statistics about the stocks and bonds of financial institutions, government agencies, manufacturing, mining, and various other companies. While Moody's Manual was a successful venture for the company, it did not have the financial resources to survive the Bank Panic of 1907, and Moody eventually sold the publication.

In 1909, John Moody returned to financial publishing with Moody's Analyses of Railroad Investments. This time, however, instead of just publishing general information and statistics, Moody offered investors his analysis of a railroad's operations and finances. He included letter rating symbols, which he adopted from the rating system used in the mercantile industry.

Moody's Investors Service was established in 1914 and built on its foundation by including ratings for industrial companies, utilities, and government bonds issued by U.S. cities and municipalities. Moody's Investors Service was bought by credit reporting company Dun & Bradstreet (D&B) in 1962 but was spun off in 2000. It has been an independent company ever since.

In 1975, the U.S. Securities and Exchange Commission (SEC) made Moody's a Nationally Recognized Statistical Rating Organization (NRSRO), along with Standard & Poor's (S&P), and Fitch Ratings. 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.

Moody's Investors Service provides credit ratings and analysis covering more than 130 countries, 11,000 corporate issuers, and 21,000 public finance issuers.

The 2008 Financial Crisis

Moody's, Standard & Poor'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 European countries for aggressive sovereign credit rating 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 (OCR) 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.