Moody's stock tanks after revealing SEC is investigating their ratings practices and contributions to the 2008 market collapse

Last Friday Moody's  Investors Service, a financial ratings company, revealed in a filing with the Securities and Exchange Commission that federal investigators called its procedures for quantifying some debt ratings "false and misleading...in light of the company's finding that a rating committee policy had been violated." The SEC plans an administrative review.

The company's own investigation found errors in the way it rated complex European debt products in 2007 called constant-proportion debt obligations.

Moody's says it disagrees with the SEC's findings and has filed a response to the inquiry.

Critics say that Moody's and other ratings agencies failed to adequately review mortgages that were packaged and sold on Wall Street before the economic crises spread globally.

The ratings that were ultimately assigned proved too generous, considering the state of the market. To make matters worse, the agencies were much too slow in downgrading housing bonds, overlooking signs of excess that almost everyone else in the industry recognized.

The conflict of the industry is that if the ratings companies prevent the creation of a high percentage of highly rated financial instruments, these mortgage securities deals won’t sell. The ratings agencies’ customers—the investment banks—will be unhappy, and the ratings agencies’ bottom lines will suffer.

“Bankers get paid a lot of money. The ratings-agency people get pushed,” says a hedge fund manager who is betting that the securitization market will continue to sour. The agencies “never stopped to question” this, he says, “because they had zero economic risk.” 


A panel investigating the roots of the financial crisis used its subpoena power for the first time last month to obtain documents from Moody's Corp.


The chairman of the Financial Crisis Inquiry Commission said Moody's refused to provide the documents voluntarily.

Moody's stock fell sharply Monday following Friday’s news that the ratings company is being investigated by the SEC.