Moody's Investors Service

Founding and early history

Moody's traces its history back to two publishing companies established by John Moody, the inventor of modern bond credit ratings. In 1900, Moody published his first market assessment, called Moody's Manual of Industrial and Miscellaneous Securities, and established John Moody & Company. The publication provided detailed statistics relating to stocks and bonds of financial institutions, government agencies, manufacturing, mining, utilities, and food companies. It experienced early success, selling out its first print run in its first two months. By 1903, Moody's Manual was a nationally recognized publication. Moody was forced to sell his business, due to a shortage of capital, when the Panic of 1907 fueled several changes in the markets.

Moody returned in 1909 with a new publication focused solely on railroad bonds, Analysis of Railroad Investments, and a new company, Moody's Analyses Publishing Company. While Moody acknowledged that the concept of bond ratings "was not entirely original" with him—he credited early bond rating efforts in Vienna and Berlin as inspiration—he was the first to publish them widely, in an accessible format. Moody was also the first to charge subscription fees to investors. In 1913 he expanded the manual's focus to include industrial firms and utilities; the new Moody's Manual offered ratings of public securities, indicated by a letter-rating system borrowed from mercantile credit-reporting firms. The following year, Moody incorporated the company as Moody's Investors Service. Other rating companies followed over the next few years, including the antecedents of the "Big Three" credit rating agencies: Poor's in 1916, Standard Statistics Company in 1922, and the Fitch Publishing Company in 1924.

Moody's expanded its focus to include ratings for U.S. state and local government bonds in 1919 and, by 1924, Moody's rated nearly the entire U.S. bond market.

1930s to mid-century

The relationship between the U.S. bond market and rating agencies developed further in the 1930s. As the market grew beyond that of traditional investment banking institutions, new investors again called for increased transparency, leading to the passage of new, mandatory disclosure laws for issuers, and the creation of the Securities and Exchange Commission (SEC). In 1936 a new set of laws were introduced, prohibiting banks from investing in "speculative investment securities" ("junk bonds", in modern terminology) as determined by "recognized rating manuals". Banks were permitted only to hold "investment grade" bonds, following the judgment of Moody's, along with Standard, Poor's and Fitch. In the decades that followed, state insurance regulators approved similar requirements.

In 1962, Moody's Investors Service was bought by Dun & Bradstreet, a firm engaged in the related field of credit reporting, although they continued to operate largely as independent companies.

1970s to 2000

In the late 1960s and 1970s, commercial paper and bank deposits began to be rated. As well, the major agencies began charging the issuers of bonds as well as investors — Moody's began doing this in 1970 — thanks in part to a growing free rider problem related to the increasing availability of inexpensive photocopy machines, and the increased complexity of the financial markets. Rating agencies also grew in size as the number of issuers grew, both in the United States and abroad, making the credit rating business significantly more profitable. In 2005 Moody's estimated that 90% of credit rating agency revenues came from issuer fees.

The end of the Bretton Woods system in 1971 led to the liberalization of financial regulations, and the global expansion of capital markets in the 1970s and 1980s. In 1975, the SEC changed its minimum capital requirements for broker-dealers, using bond ratings as a measurement. Moody's and nine other agencies (later five, due to consolidation) were identified by the SEC as "nationally recognized statistical ratings organizations" (NRSROs) for broker-dealers to use in meeting these requirements.

The 1980s and beyond saw the global capital market expand; Moody's opened its first overseas offices in Japan in 1985, followed by offices in the United Kingdom in 1986, France in 1988, Germany in 1991, Hong Kong in 1994, India in 1998 and China in 2001. The number of bonds rated by Moody's and the Big Three agencies grew substantially as well. As of 1997, Moody's was rating about $5 trillion in securities from 20,000 U.S. and 1,200 non-U.S. issuers. The 1990s and 2000s were also a time of increased scrutiny, as Moody's was sued by unhappy issuers and investigation by the U.S. Department of Justice, as well as criticism following the Enron scandal, the U.S. subprime mortgage crisis, and the 2008 financial crisis.

Role in capital markets

Together, Moody's, S&P and Fitch are sometimes referred to as the Big Three credit rating agencies. While credit rating agencies are sometimes viewed as interchangeable, Moody's, S&P and Fitch have different methodologies. All three operate worldwide, maintaining offices on six continents, and rating tens of trillions of dollars in securities.

Moody's Ratings and its close competitors play a key role in global capital markets as supplementary, third-party providers of credit analysis used by banks and other investors when assessing the credit risk of particular securities. This form of third party analysis is particularly useful for smaller and less sophisticated investors, as well as for all investors to use as an external comparison for their own judgments.

Credit rating agencies also play an important role in the laws and regulations of the United States and several other countries, such as those of the European Union. In the United States their credit ratings are used in regulation by the U.S. Securities and Exchange Commission as nationally recognized statistical rating organizations (NRSROs) for a variety of regulatory purposes. Among the effects of regulatory use was to enable lower-rated companies to sell bond debt for the first time; their lower ratings merely distinguished them from higher-rated companies, rather than excluding them altogether, as had been the case. However, another aspect of mechanical use of ratings by regulatory agencies has been to reinforce "pro-cyclical" and "cliff effects" of downgrades. In October 2010, the Financial Stability Board (FSB) created a set of "principles to reduce reliance" on credit rating agencies in the laws, regulations and market practices of G-20 member countries. Since the early 1990s, the SEC has also used NRSRO ratings in measuring the commercial paper held by money market funds.

The SEC has designated seven other firms as NRSROs, including, for example, A. M. Best, which focuses on obligations of insurance companies. Companies with which Moody's competes in specific areas include investment research company Morningstar, Inc. and publishers of financial information for investors such as Thomson Reuters and Bloomberg L.P.

Controversies

Sovereign downgrades

Moody's, along with the other major credit rating agencies, is often the subject of criticism from countries whose public debt is downgraded, generally claiming increased cost of borrowing as a result of the downgrade. Examples of sovereign debt downgrades that attracted significant media attention at the time include Australia in the 1980s, Canada and Japan in the 1990s, Thailand during the 1997 Asian financial crisis, and Portugal in 2011 following the European sovereign debt crisis.

Unsolicited ratings

Moody's has occasionally faced litigation from entities whose bonds it has rated on an unsolicited basis, and investigations concerning such unsolicited ratings. In October 1995, the school district of Jefferson County, Colorado sued Moody's, claiming the unsolicited assignment of a "negative outlook" to a 1993 bond issue was based on Jefferson County having selected S&P and Fitch to do its rating. Moody's rating raised the issuing cost to Jefferson County by $769,000. Moody's argued that its assessment was "opinion" and therefore constitutionally protected; the court agreed, and the decision was upheld on appeal.

In the mid-1990s, the U.S. Justice Department's antitrust division opened an investigation to determine whether unsolicited ratings amounted to an illegal exercise of market power, however the investigation was closed with no antitrust charges filed. Moody's has pointed out that it has assigned unsolicited ratings since 1909, and that such ratings are the market's "best defense against rating shopping" by issuers. In November 1999, Moody's announced it would begin identifying which ratings were unsolicited as part of a general move toward greater transparency. The agency faced a similar complaint in the mid-2000s from Hannover Re, a German insurer that lost $175 million in market value when its bonds were lowered to "junk" status. In 2005, unsolicited ratings were at the center of a subpoena by the New York Attorney General's office under Eliot Spitzer, but again no charges were filed.

Following the 2008 financial crisis, the SEC adopted new rules for the rating agency industry, including one to encourage unsolicited ratings. The intent of the rule is to counteract potential conflicts of interest in the issuer-pays model by ensuring a "broader range of views on the creditworthiness" of a security or instrument.

Alleged conflicts of interest

The "issuer pays" business model adopted in the 1970s by Moody's and other rating agencies has been criticized for creating a possible conflict of interest, supposing that rating agencies may artificially boost the rating of a given security in order to please the issuer. The SEC recently acknowledged, however, in its September 30, 2011 summary report of its mandatory annual examination of NRSROs that the subscriber-pays model under which Moody's operated prior to adopting the issuer pays model also "presents certain conflicts of interest inherent in the fact that subscribers, on whom the NRSRO relies, have an interest in ratings actions and could exert pressure on the NRSRO for certain outcomes". Other alleged conflicts of interest, also the subject of a Department of Justice investigation the mid-1990s, raised the question of whether Moody's pressured issuers to use its consulting services upon threat of a lower bond rating. Moody's has maintained that its reputation in the market is the balancing factor, and a 2003 study, covering 1997 to 2002, suggested that "reputation effects" outweighed conflicts of interest. Thomas McGuire, a former executive vice president, said in 1995 that: "[W]hat's driving us is primarily the issue of preserving our track record. That's our bread and butter".

In March 2021, Moody's reached a settlement with the European Union regarding alleged conflicts of interest. Moody's was fined 3.7 million euros ($4.35 million).