Spotlight: Moody's Corporation

Moody's (NYSE:MCO) is often still criticized for its role in the financial crisis of 2007/2008, but is this criticism still justified today? There can be no doubt that Moody's helped strengthening the effects of the financial crisis, but if the rating agencies failed so miserably, why are they still around? Even more, why is Moody's current stock price higher than it was in 2007? During and immediately after the crisis, investors started investing in safe havens such as treasuries to limit their losses. Consequently, due to the lack of risk-taking, the need for ratings was low. But the tide has turned as investors became more confident again. Resulting in a higher demand for risky assets. This resulted in companies issuing more complex and more risky assets as well, leading in turn to a higher demand for ratings as well. Since companies pay Moody's to get a rating, this also increased Moody's' revenues. Especially since investors also regained confidence in ratings, which gave companies a reason to get rated by Moody's. It also seems that Moody's has learned from the crisis as they are currently the rating agency which gives the most conservative ratings for risky products. On the other hand, this is bad for Moody's, because companies often get their ratings from Moody's' competitors, where they can get a higher rating than Moody's would have given them. Moody's is therefore the moral winner, but could financially be left behind its competitors. Nevertheless, Moody's keeps beating market expectations quarter after quarter. In the end, it is the investor who decides what rating agency will perform well. If ratings by Moody's are trusted and ratings by Fitch are not, then the investors will buy more products that are rated by Moody's. Consequently, companies that issue rated products are better off having an investor-trusted rating so they can raise capital more easily. Thus in the long run, Moody's may be better off giving more conservative ratings that can be more trusted than those of its competitors, who seem to focus more on short-term gain by overstating ratings to attract issuers. Moody's is working hard to regain investor trust, but it still has a long way to go. It may take decades for Moody's to be fully trusted again, resulting in opportunities for new rating agencies. However, since investors are once again willing to take more risk and thus the demand for ratings also increases, we think Moody's will also keep on increasing revenues in the short run.