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Moody’s hurt by its tougher rules

Jill Barshay Jul 18, 2007

Moody’s hurt by its tougher rules

Jill Barshay Jul 18, 2007


Kai Ryssdal: Speaking of which, this one broke late yesterday afternoon, you might have missed it. Bear Stearns admitted two of its hedge funds that have been battered by the mess in subprimes, once worth $1.5 billion all told, have essentially evaporated.

The bonds those funds invested in, and most other corporate bonds, too are evaluated — or graded — by credit rating agencies. Companies you’ve heard of, like Standard & Poors and Moody’s. Triple A is good, junk is bad.

This week, Moody’s made it harder to get that A. And now, it says it’s losing business. Our New York bureau chief, Jill Barshay, reports.

Jill Barshay: Moody’s is worried about the kind of bonds that are backed by pools of commercial mortgages. The bond holders get their money when mortgage holders make their monthly payments.

The bonds are rated on a scale. The most secure are rated triple A, and they get paid first. The least secure get junk ratings, and they get paid last. If a large number of people fail to make their mortgage payments, the lower-rated bonds will default.

There might not even be enough money to pay the triple A bonds. So in April, Moody’s told issuers of these bonds not to create so many triple A’s.

Tad Philipp is a managing director at Moody’s. He wants to make sure the triple A bonds that are issued are more secure. But today, he said that bond issuers are turning away from Moody’s.

Tad Philipp: We have lost about 75 percent of the deals. Normally, we would rate 75 percent. Recently, we have been missing 75 percent, so our marketshare has done a backflip lately.

Philipp says he’s trying to protect investors.

Paul Fiorilla is managing editor of Commercial Mortgage Alert. He says Moody’s has turned off issuers who are worried that tougher ratings will make their bond business less profitable.

Paul Fiorilla: Well, it kind of highlights the whole inherent conflict in the whole rating agency business. If Moody’s or any agency is too harsh in the way it rates deals, it loses business.

Fiorilla says it’s not clear how much more stringent the new measures by Moody’s are compared to other agencies. But by bypassing Moody’s and going to S&P and Fitch, issuers are proving to investors that not all A ratings are the same.

In New York, I’m Jill Barshay for Marketplace.

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