SEC Signals Prosecution of Moody’s « The Washington Independent

Late on Friday, Moody’s — one of two major credit rating agencies — announced in a quarterly filing that it had received a “Wells Notice,” a warning from the Securities and Exchange Commission that the government intends to prosecute. The Wells Notice concerned whether Moody’s misled regulators in 2007 by not properly disclosing a computer glitch that mistakenly granted AAA ratings to a number of debt products. If the case goes forward and the SEC wins, Moody’s might be stripped of its license.

News of the notice has sent Moody’s stock precipitously lower. (By my back-of-the-envelope calculations, its decline over the past few trading days has cost Warren Buffett, whose firm Berkshire Hathaway is a major Moody’s investor and who is personally a Moody’s defender, some $100 million.)

The case underscores the dire need to reform the ratings agencies. Sen. Al Franken (D-Minn.) plans to introduce an amendment to Sen. Chris Dodd’s (D-Conn.) financial regulatory reform bill removing the conflict of interest at the heart of the ratings agencies business. Currently, companies pay ratings agencies to rate their securities and sometimes pressure the agencies by tacitly threatening to or actually pulling their business if the agencies don’t come up with high ratings. Under the Franken amendment, the SEC would pick a ratings agency to review a specific financial product. Though my preferred way to reform ratings agencies would be for them to go out of business and for investors to hire firms to do due diligence on financial products for them.