Moody's Securities Rating Firm Under Suspicion

[May 29, 2008.]

 

The Moody's Corporation, a securities rating firm, is under suspicion of giving false ratings to some of the securities that it had been evaluating. Currently, the corporation is looking into whether those inaccurate, high ratings were the result of computer mistakes.

These troubles are causing some of the Moody's corporation's many critics to come out of the woodwork. Richard Blumenthal, the attorney general of Connecticut, is one of these critics. The recent investigation has caused Blumenthal to become alarmed. He is worried that these mistakes may hide something more sinister.

“One of the areas that most concerns us,” Blumenthal stated during the course of an interview, “is the potential favoritism and abusive and illegal practices that involve dealings with the companies they rate.”

Moody's, along with two more ratings firms - Standard & Poor's and Fitch Ratings - has been criticized for years now for appearing to consistently give high ratings to certain high-risk securities. Over the course of the last few years, the items most highly rated by these three companies have actually declined in worth.

In particular, Moody's  recent computer mistakes have caused certain securities from Europe to be rated four entire grades higher than they were actually worth. The Financial Times has, additionally, claimed that Moody's did not lower the high ratings of these securities after discovering its error. Instead, the company rephrased its evaluation of the securities in question such as to allow the high ratings to remain true.

These claims constitute a serious blow to the company's credibility, and to the credibility of security ratings firms as a whole. Consequently, Moody's has charged Sullivan & Cromwell, the legal firm that serves the company, with the task of investigating what really went on.

Meanwhile, certain parties in America's capital are urging for another inquiry into the affairs of Moody's, from outside the company. Sen. Charles Schumer (D.-NY) has exhorted the Securities and Exchange commission to examine the situation.

However, Christopher Cox of the S.E.C. announced earlier today that the S.E.C. has no jurisdiction over this particular incident, as the erroneous ratings were given in Europe, and not in the United States.