Companies That Will Never Recover from Their Mistakes
Moody's
It says a great deal when Warren Buffett buys a significant stake in a company and then sells much of that position only a short time later. He invested in Moody’s because it was one of the leaders of the rating industry and had been for a century. Along with S&P, it was the gold standard of its industry
Moody’s has been blamed for misrepresenting the independence of its rating of mortgage-backed securities. The rapid drop of the value of these securities was the major cause of the credit crisis. Referring to the ratings on subprime paper, The Week reported that the head of the US Congressional Financial Crisis Inquiry Commission said “flipping a coin would have been five times more accurate in making an investment decision than trusting Moody’s ratings of sub-prime backed securities before the credit crunch.” The magazine added, “Of the (sub-prime backed) securities given the highest AAA-rating in 2006 by Moody’s, 89 per cent were downgraded to junk status a year.”
There was no one in the management of Moody’s at the time that these ratings were offered to investors who did not know that independence and integrity were the most critical values for the company’s success. This is true with all securities that Moody’s rates and its action with sub-prime paper had the effect of calling all of its research into question. In early 2007, Moody’s shares traded above $73. Today the stock sits just above $26. The “trust” issue will dog the company into the future.
(AP Photo/Henny Ray Abrams)
Moody’s has been blamed for misrepresenting the independence of its rating of mortgage-backed securities. The rapid drop of the value of these securities was the major cause of the credit crisis. Referring to the ratings on subprime paper, The Week reported that the head of the US Congressional Financial Crisis Inquiry Commission said “flipping a coin would have been five times more accurate in making an investment decision than trusting Moody’s ratings of sub-prime backed securities before the credit crunch.” The magazine added, “Of the (sub-prime backed) securities given the highest AAA-rating in 2006 by Moody’s, 89 per cent were downgraded to junk status a year.”
There was no one in the management of Moody’s at the time that these ratings were offered to investors who did not know that independence and integrity were the most critical values for the company’s success. This is true with all securities that Moody’s rates and its action with sub-prime paper had the effect of calling all of its research into question. In early 2007, Moody’s shares traded above $73. Today the stock sits just above $26. The “trust” issue will dog the company into the future.
(AP Photo/Henny Ray Abrams)
