Moody's Under SEC Investigation

NEW YORK — Moody's Investors Service stock fell sharply Monday following news that the ratings company is being investigated for possibly misleading regulators three years ago.

Moody's disclosed late Friday that it might face a Securities and Exchange Commission administrative charge that it misled regulators when it applied for its license in 2007. Ratings agencies must be licensed by the federal government.

The investigation comes as ratings agencies like Moody's and Standard & Poor's continue to face scrutiny and criticism related to their role in the credit crisis.

Moody's stock dropped $1.59, or 6.8 percent, to $21.77 Monday, although the broader market rose sharply.

Ratings agencies have been criticized in recent years for giving certain investments top ratings only to see those investments collapse. The investments, such as securities backed by subprime mortgages, have been blamed for contributing to the 2008 credit crisis and the recession.

The investigation grows out of a separate issue, its ratings of European investments.

In 2008, Moody's acknowledged that a computer error led to incorrect ratings on 11 fixed-income investments worth about $1 billion. Moody's also said employees failed to fix the errors immediately after discovering them.

The SEC said Moody's might have provided false and misleading statements in its license application in 2007 based on the erroneous ratings discovered in 2008, according to the regulatory filing.

Moody's said in the filing it has already responded to the SEC. The company said its initial license application was accurate.

Executives from Moody's and S&P testified before Congress last month about their role in rating risky investments. Critics maintain ratings agencies were too close to the companies issuing debt to provide fair, accurate ratings assessments.

Moody's rated some of the investments that are at the heart of the SEC's civil fraud investigation against Goldman Sachs Group Inc., one of the big Wall Street banks that packaged the mortgage-related securities and other complex investments.

Ratings agencies are also facing lawsuits from investors who used the top ratings when they decided to invest in the risky securities.

Comments

[HORATIO22]

04:20 PM on 05/12/2010

What an asinine clusterf**k !!.................the fact that the rating agancies are paid by the banks that constructed financial WMD's is even allowed..........is once again our brilliant government allowing this to even take place !! It's liken to the restuarant paying the critique for it's review ! Would anyone trust the reviews?? Anyone who tries to blaim either the investment banks, the mortgage companies or the government AS MORE AT FAULT THAN THE OTHER IS MISSING THE BOAT ! This is absolutely disgusting.

[thepheonix]

09:43 AM on 05/12/2010

The government are not going after manipulation. They are going after Moody's to shut them up. The don't want them to come out and downgrade the US. That would severely hurt the financial markets

[duxguts]

10:40 PM on 05/11/2010

Ratings agencies are nothing more than inside traders. The push the market up or down to their liking.

[Poindexter718]

06:12 AM on 05/12/2010

and your evidence for that is what?
and inside traders who don't actually, umm, trade anything make money off manipulating the market how?

[Poindexter718]

09:11 PM on 05/11/2010

The rating agencies are the wrong place to look for pure Wall Street excess. They are lousy, low-margin businesses that tend to draw B-players who don't make it at securities firms or who want a slightly less intense lifestyle and don't mind making 30% of what their former colleagues at the banks make.
Yes, their business model is fundamentally flawed in that the issuers pay their fees and it ought to be remedied (though getting investors to stump for the cost is not as easy as it might sound), but they are not like the banks; the populists should take their pitchforks elsewhere.

[LCLA]

02:59 PM on 05/12/2010

You sound like you must be a Moody's employee, Poindexter.
I agree that the rating agencies are not the primary culprits in the Wall Street shenanigans, but they do play their role, and investors like me depend upon them to be honest and as accurate as possible. No free pass.

[Poindexter718]

04:52 PM on 05/12/2010

Nope, not a Moody's employee. And agree: No free pass. Their business model is intrinsically conflicted. It will be hard to change, however, though the government does have some leverage in the sense that the rating agencies ratings do get official sanction in some contexts and that sanction can be withheld.
My only point was that a lot of other commentators in here appeared to be lumping them in with the banks in terms of exorbitent profits and pure greed and I thought it worth pointing out that they are busboys eating scraps off the table of the real Masters of the Universe.

[HORATIO22]

04:23 PM on 05/12/2010

LCLA

Exactly read my post above. I rest my case.

[holyghostie]

08:20 PM on 05/11/2010

People at Moody's and Standard and Poor's were the pimps that enabled the Banks to shill the derivatives on unsuspecting suckers. They need to do a perp walk.

[Morgantheaxe]

07:45 PM on 05/11/2010

This is why my money is in real assets now and not the market. I paid off debt, and spent the rest improving my land. My wife decided to do the same. Neither of us have a dream of simply letting our savings ride in the market and one day having a worry free retirement any longer. Sounds so foolish to say it out loud. Im going to work and save then give the money to someone else to "invest" for me and at the end Ill be financially secure. We both decided that everything in life thats been good for us is what we built ourselves. So, we are back to that philosophy. We are going to make our own retirement by becoming independant as possible. You have a piece of paper that has an assigned value to it. I have a cow. Literally. When this Fed audit comes out and you see just how awful things really are in our government. Eat your paper....Im eating my cow. Well maybe not....I kinda like my cows.

[WIpatriot]

08:59 AM on 05/12/2010

Good for you. Seriously.

[Cary Ganz]

03:41 PM on 05/11/2010

I just don't get it. Big financial institutions pay Moodys and Standard and Poors for ratings that are then used to sell the product to the unsuspecting public. These big companies make money with what can be and has been shown to be bogus ratings (do I need to say Toxic Assets). Hummmmm....seems like a bit of conflict of interest to me.

[floodberg]

05:27 PM on 05/11/2010

They don't see a conflict, and our President and Government make huge amounts of cash and 'off the book' perks to see it their way. That's why Blankfein never really got worried on CSpan.

[sunshine14]

03:26 PM on 05/11/2010

lobbyist paid $$$$$ to

[MakeAWish]

03:02 PM on 05/11/2010

SEC to Moody; Heads up! Were coming to investigate you! Just want to give you LOTS of warning, so you will have time to go tell your cronies and get your books in order and stories straight! Are you ready? Not ready? Okay, we'll give you more time. Tell us when your ready!

[StJames]

03:18 PM on 05/11/2010

The SEC does this with all its investigations...Goldman Sachs had even more time if I remember correctly. Pathetic system of regulation isn't it?

[sunshine14]

03:25 PM on 05/11/2010

What regulations? 8 years flood gates were open

[floodberg]

07:58 PM on 05/11/2010

I'm answering your query here. RU wants to openly sell technology to IR. That's fine with big money (Haliburton's got a Tehran branch) but the US can't allow that on a security basis (US computers in Tehran with a fundamentalist regime, nuclear program and terror ties.) Obama's donors and latest lobbying numbers indicate that hitech/defense are giving big, which means US defense contracts coming as a result of this treaty, and it looks like a big fighter program, or maybe spacebased. (Oops; I never checked defense stocks when Obama 'privitized' transport to ISS.) That's my first problem.

Problem #2 is Poland. I'm not convinced that crash was an 'accident', It's either pilot error in intentional. The pilot was highly experienced in low visibility no computer landings. Unlike other TU-254 recent crashes, there's no sign of intentional shootdown. Poland had a 'change of heart' toward RU. I'm looking for whatever big money wants from a Poland/Russian thaw. I've found some interesting things, but I'm 'missing' this connection. Any ideas, especially 'silly' ones (they work!) would be appreciated.

[Poindexter718]

04:55 PM on 05/11/2010

There's nothing in the story to suggest that Moody's received warning that it was going to be investigated and, contrary to what the first respondent said, it's usually not the SEC's modus to give you any sort of warning, especially if it's the enforcement division that is conducting the inquiry. Goldman might have received a Wells Notice that it was going to be subject of a complaint, but that was at the end of the investigation, not the beginning. SEC Audit might call on a Friday and say they're coming Monday and will expect you to produce X, Y and Z documents (routine audit) , but they can look at anything subsequently--old emails, phone tapes etc.--and any funny bizness would be at extreme peril to the subject firm.

[StarDagger]

02:44 PM on 05/11/2010

The idea that a credit-rating agency is 1) a for profit corporation and 2) not performed by the govt is a fine indicator of how screwed up our country is.

[floodberg]

05:32 PM on 05/11/2010

FEDRES thinks it's just dandy and works just fine doing what FEDRES wants it to do.

Oh, StarDagger, were you referring to the President and Congress? They're only paid employees of FEDRES. (I decided to use FEDRES instead of TBTF; there were some banks/brokers that were upset over being left out of TBTF. I try to be sensitive.)

[StarDagger]

06:46 PM on 05/11/2010

Again in English and full coherent sentences.

[Linda from Deerfield]

01:51 PM on 05/11/2010

Ratings are overrated. As best I can tell, in most contexts, they are nothing more than a summary of information that is readily available, and a judgment based on broad histories. If they were a perfect reflection of risk, they would plunge before things fall to pieces instead of after, but they don't. Applied to people and towns and nations and the like, a bad rating is like an invitation to slaughter and pick the bones of a critter that's stumbled. No wonder financiers thrive when whole economies are stumbling. I really don't see that much would be gained by transforming ratings into a perfect early warning that would then become a self-fulfilling prophesy and a faster dive into the contagion of destruction.

That is not to excuse errors or negligence or deliberate deceit, but in my opinion, ratings are never going to deliver the safety that some imagine.

[StJames]

03:21 PM on 05/11/2010

Hi Linda! I had a major debate with someone about 2 months ago when I said the rating agencies should be taken down because they are worse than worthless, they are criminally negligent at best and guilty of collusion at worst. They are also worthless as ratings agencies because they are paid by the companies they are supposed to be rating...how is that supposed to be work for honesty?

[Linda from Deerfield]

04:33 PM on 05/11/2010

I guess I probably kind of threw up my hands when Morningstar didn't drop the 5 star rating of Schwab Yield Plus ultra-short-bond fund until after word leaked that it was secretly loaded with toxic mortgage assets and everybody was bailing out so it was plunging -- they said, basically, sorry, we rate on past performance. Then all of a sudden they said that there was no reason to hang on to it because it couldn't possibly rebound. Talk about worthless -- it makes ratings seem worse than worthless.

When it's also a conflict of interest, I heartily agree that it can't work, but I can't figure out who should pay. Government? If there's just one client for a derivatives package, maybe the client should pay, but I don't know about when there are thousands of clients. We do need to assure honesty. We probably also need to do something to make sure that so-called sophisticated parties understand what the rating does and doesn't tell them, when they're investing on behalf of regular people -- I'm not convinced that they know when it comes to complex derivatives.

Sorry for being so wordy -- I really just wanted to say congratulations to you and your son on his law school graduation, which I think I noticed you mention on the weekend.

[altohone]

12:38 PM on 05/11/2010

Why only investigate this one of many criminally inspired ratings? Do they have timid Tina in charge?
Are these regulators following a script written by the billionaires who robbed our country?

[Poindexter718]

01:27 PM on 05/11/2010

Why only investigate this one? Because they don't like to bring cases that they can't win.
For better or worse, the government (and any half sophisticated investor, for that matter) was completely aware of and implicitly endorsed the problematic business model of the agencies getting paid by the issuers of the securities they were rating. Unless they find specific proof that the rating agencies sandbagged on any given transaction in order to win the business, they got nothing.

[floodberg]

05:39 PM on 05/11/2010

Poindexter, they don't bring 'cases,' they 'investigate' and then 'put them on hold.' Every once in a while they actually file a legal case, but I'd have better odds betting that the SEC chairman would be abducted by space aliens.

[mrspiffy]

12:32 PM on 05/11/2010

Good. Gonnifs.
http://yieldpig.blogspot.com/

[Aikaterina]

11:23 AM on 05/11/2010

"Critics maintain ratings agencies were too close to the companies issuing debt to provide fair, accurate ratings assessments."

Critics should also note ratings agencies were handsomely rewarded (fees, perks, junkets, gifts, etc.) for their high marks. By any standard, this is bribery, and while not technically illegal, it is certainly unethical. Any educator caught selling grades would be fired, yet these cretins are still peddling their "opinons," knowing investors rely upon those when making choices about which products or firms to buy shares.

The executives of Moody's, S&P, and other ratings agencies openly admitted they predicated their AAA-ratings for derivatives, CDS's, CDO's, and other funds (laden with unsecured loans) on the eventual government bail-out after their demise, a de-facto admission they knew these were high-risk and would become worthless. Their job was to accurately assess the risks, volatility or stability, and potential growth of products they grade-rank or recommend, not base an endorsement on who may cover losses when the product fails.

Institutional (unions, government, and corporate pension fund managers) as well as individual investors rely upon ratings as a basis for making choices, and expect those ratings to be based on accuracy, objectivity, not bias, bribery, or an expected taxpayer bail-out when those instruments become "toxic assets."

Those artificial high ratings enabled the continuation of predatory loan practices, bundling of loans, and peddling them to unsuspecting investors, and magnified the dimensions and effects of the market-economic collapse.

[Poindexter718]

11:59 AM on 05/11/2010

I take no issue w/much of what you said but would be interested in knowing where you saw agency officials quoted saying A3 "for derivatives, [they don't rate CDS], CDOs and other funds" assumed a bailout. I know they always gave Fannie and Freddie corporate debt A3 because of the implicit gov't guaranteee, but never saw that WRT structured credit instruments ...
And if they did assume the gov't would bail them out on the senior tranches of mortgage backed CDOs, they were sorely mistaken!

[dukeitout]

12:14 PM on 05/11/2010

You say "technically it was not illegal." I say "technically it was illegal." They were active participants in an illegal scheme. You can't legally sell junk as though it was new and top rated.

[FoonTheElder]

11:20 AM on 05/11/2010

It's about time someone got to the real heart of the subprime mortgage scandal.

The market can price junk mortgages is they know they are junk mortgages. If an investor loses all of their money by investing in junk, they knew about the risk going in.

The problem is when junk is marketed as a top rate investment due to fraud and incompetence by the rating agencies.