KAI RYSSDAL: If you’ve ever tried to buy something on credit, you know how important your credit score is. And how your mortgage or car loan can ride on one lousy number.
It turns out even the biggest banks in the world have to worry about their scores. Moody’s is one of the companies that make it their business to rank the credit-worthiness of those banks. It changed its ranking system not too long ago and upgraded ratings for 150 banks, because they were deemed more likely to win a government bailout should they run into trouble.
Today, though, Moody’s changed its mind. It said it won’t be considering those bailouts after all. Marketplace’s Bob Moon explains why — and why it matters.
BOB MOON: Innovation is not always rewarded. And in the case of this bold new idea from Moody’s, it quickly came under intense ridicule from financial analysts around the world.
One even spoke of laughing out loud to learn that several banks in Iceland had been given AAA ratings, equal to those of Exxon Mobil and even the U.S. Treasury.
Still, New York University professor Edward Altman says he understands the logic. It’s similar to the co-signer on a car loan.
EDWARD ALTAN: When there is a guarantor of an obligation, one usually evaluates the credit-worthiness of the guarantor as well as the entity being guaranteed.
Moody’s figured there’s a 98 percent chance, for example, that J.P. Morgan would get government help in a crisis.
But at the independent research firm CreditSights, analyst John Raymond says that’s not what lenders care about.
JOHN RAYMOND: The way that ratings are used in the capital markets, people prefer ratings to give them an indication of how far away a bank is from getting into financial difficulties.
Raymond says Moody’s ended up hurting its credibility as a reliable source of information.
And NYU’s Edward Altman says even though Moody’s was only offering more data for investors to consider, there was at least a perception it was guesswork. That’s because governments aren’t exactly the same as a co-signer.
ALTMAN: There was no guarantee at all that the sovereign would bail out these banks. And therefore, it was a leap of faith to assume that they would.
So today, Moody’s began a review towards cutting its ratings on more than 40 U.S. and European banks that it had recently upgraded.
In Los Angeles, I’m Bob Moon for Marketplace.