Moody’s Investor Service has been the leading source of credit ratings, risk analysis and economic research for 100 years. Founder John Moody began his enterprise in 1900 as a publication containing statistics and information on financial stocks and bonds. Later, he adapted to extend his advisory services to businesses, offering industry analysis aimed at minimizing investment risk. During the Great Depression, Moody’s really established itself as a reliable source when bond default rates went up but Moody’s highest-rated bonds made all their payments. During the seventies, the Moody’s business model changed slightly again, offering ratings at a price. The idea was that calling in an objective rating service would reflect favorably upon businesses.

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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