Company Vitae: Moody's

Even nation states tremble at the prospect of a downgrade by Moody's, one of the leading bestowers of the triple-A credit rating. Where does its market-moving power come from?

by MT Staff
Last Updated: 09 Oct 2013

Formative years

In 1900, John Moody set up shop in New York to publish Moody's Manual of Industrial and Miscellaneous Securities, a compendium of financial information on the burgeoning number of stocks and bonds being issued by US companies and government agencies.

Moody's branched out in 1909 into the business that it's still in today - rating the financial strength of publicly traded securities for the benefit (in theory, anyway) of those who are in the market for them.

During the Depression and after, the firm earned a reputation as the investors' friend: bond default rates soared, but few of those rated highly by Moody's missed payments.

Recent history

The failure to downgrade banks such as Lehman Brothers and Bear Stearns in 2008 led to accusations that Moody's and arch-rivals Standard & Poor's and Fitch's were too close to the firms and products they sit in judgement on. The revenue model has also been under scrutiny: the agencies - Moody's included - charge issuers for rating their products, leading to questions of conflicting interests.

During the European sovereign debt crisis, Moody's once again got into hot water for 'bad timing' - for example, its downgrade of Portuguese debt to Ba2 'junk' status. The move outraged Brussels but at least showed Moody's was unwilling to be influenced by politicians.

Who's the boss?

Quiet man Ray McDaniel has been chairman and CEO since 2005, having worked his way right up the greasy pole after joining the firm in 1987. Under his tenure, Moody's has achieved record profits, despite the brickbats.

The secret formula?

The boom time for Moody's dates from the 1970s, when the US government decided credit ratings had become of such systemic importance that they should be provided only by officially sanctioned organisations - of which Moody's was one. This created high barriers to entry for potential competitors and led to the dominance of the big three. Such is the power of Moody's and its rivals today that even the hint of a downgrade can move markets and threaten governments.

Don't mention:

Mortgage-backed securities. Last year, the US Financial Crisis Inquiry Commission was scathing about the role played by rating agencies in the US subprime crisis and subsequent global slump. Top ratings should not have been given to securities created from parcels of subprime debt, said the commission.

VITAL STATISTICS:

Sales - $2.032bn*
Net profit - £507.8m*
Employees - c4,300
*2010 figures

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