Moody's Rating Agency:Moderators of the crisis

My opinion of rating agencies has been doubtful for past several years ever since they became a listed company and received payments for issuing their ratings, which is a total conflict of interest. This started somewhere in the 70's according to the NYT article and by the 90's Moody's was raising billions in revenues from the companies whom they were rating (mostly from structured notes) and hence jeopardising their own future! Today, no one truly believes in thier ratings.

They announced subprime crisis when the housing collapse had already started in USA and suddently downgraded billions of dollars worth of structured notes causing a steeper decline. They usually always announce the demise of any corporation, after the fact, be it Enron, Lehman or any other major catastrophe. They have access to senior management and have the best brains working for them, then why do they never pronounce their risk ratings prior to the occurence?

I just fail to understand.

I also believe that ratings agencies are only able to advise on the stability of past income and no more! What I mean by this is that they usually never give ratings to top companies of any of the emerging markets. Why? Because these companies may not have had a 'stability of past income" hence rating agencies cannot analyse them or rate them. Rating agencies cannot predict or even claim to predict future income or growth strategies keeping in mind the most recent trend or growth potential. In fairness, this is not their role. However, due to their inability to guide on future income or stability of any company or country, some of the best investment opportunities cannot be made by just looking at the available ratings.

Some of the main reasons for failures of rating agencies are outlined in this article in the New York Times.

Some Excerpts:
“These errors make us look either incompetent at credit analysis or like we sold our soul to the devil for revenue, or a little bit of both.” — A Moody’s managing director responding anonymously to an internal management survey, September 2007.

“Moody’s was like a good watchdog that had regarded the financial markets as its turf and barked and growled when anybody it didn’t know came near it,” said Thomas J. McGuire, a former director of corporate development at the company who left in 1996. “But in the ’90s, that watchdog got muzzled and gelded. It was told to turn into a lapdog.”

Edmund Vogelius, a Moody’s vice president, explained the company’s business model in a 1957 article in The Christian Science Monitor.

“We obviously cannot ask payment for rating a bond,” he wrote. “To do so would attach a price to the process, and we could not escape the charge, which would undoubtedly come, that our ratings are for sale.”

In the early 1970s, Moody’s and other rating agencies began charging issuers for opinions. The numbers of securities — and their complexity — had increased and the agencies could no longer finance their operations on revenue from investors who bought Moody’s publications.

Interesting read:

http://www.nytimes.com/2008/12/07/business/07rating.html?em=&pagewanted=all