Moody’s Investor Service

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.”

Of course not all advisory services are right 100% of the time and investors do lose money on AAA rated financial products — sometimes a lot of money. More than one investor has appealed to district judges, complaining that they were misled by “deceptive ratings.” In the past, Moody’s has countered this argument that their opinions and investment advice are protected by First Amendment/Free Speech rights. On September 2nd, in a landmark decision, U.S. District Judge Shira Scheindlin rejected these First Amendment claims and ruled that investors are allowed to sue these companies. “It reminds me of when the courts finally ruled a tobacco victim could sue a cigarette company,” said David Einhorn, 40, a hedge fund manager who is betting against Moody’s Investor Service. “The damage in this case is large, relative to the ability to pay.” Even so, Moody’s spokespeople said they are “confident” that this judgment will turn out well.

Some people have argued for reform of Moody’s Investor Service and other rating agencies like it. “Ratings services still exert significant influence, if only because clients still adhere to old methodologies,” William H. Gross of the Pacific Investment Management Company (PIMCO) told the NY Times in an email. Some argue that a government advisory council should oversee the rating process, since, in the end, it is the government that winds up bailing out these failed financial institutions like Lehman Brothers. Others say the issuer-payer model that was introduced in the seventies needs to be eliminated because it’s a conflict of interest.

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