Moody's (MCO) New Ratings System Is A Sham

Banking, finance, and taxes

Published: February 5, 2008 6:11 am

Moody’s (MCO) wants to replace its old ratings system, which used letter grades, with a new one which will use numbers. It also wants to put "warning labels" on securities like CDOs because they are complex and hard to rate

According to The Wall Street Journal "more broadly, the ratings firm is trying to decide whether to add warning labels that essentially acknowledge the limitations of its ratings."

Please pardon those who think that the new "system" comes a little late. Tens of billion of dollars of mortgage-related securities have been written off by banks and investment houses. Many of those had an "AAA" rating and none of them were rated "junk".

The move is window dressing of the worst sort. The entire purpose behind Moody’s, S&P, and Fitch is that they have the skills to assess risk in advance, or, at the very least, will not give strong ratings to debt which is likely to be inherently volatile. Baskets of securities are bound to be more difficult to understand than straight government or corporate debt. Moody’s did not acknowledge that until so much money was lost that they had to.

Moody’s actions with regard to CDOs and other bundles of securities went beyond poor judgment to the brink of recklessness. Institutions which have the sole purpose of safe-guarding money and fail catastrophically should be replaced by more efficient services.

A cosmetic change does not do that.

Douglas A. McIntyre

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