Moody’s: Moody’s shareholders panicked after the company said the Securities and Exchange Commission is investigating the credit rating firm. It’s easy to see why: the probe centers on whether Moody]s misled regulators in its last application as a NRSRO (nationally recognized statistical rating organization), rekindling concerns about its future as one of the top two credit raters.
Yet, shareholders may have missed the bigger target. Unless there’s a fundamental change in how financial markets and regulators assess credit risk, Moody’s is likely to weather the blows.
The outcome of the SEC investigation is anyone’s guess — penalties can range from a slap on the wrist to an injunction to prevent future violations. The NRSRO designation has helped Moody's and its main rival Standard & Poor's hold onto their dominant market share. Any alleged false statements pertaining to the firm’s application for the status, therefore, would obviously be a concern.
But nearly three years after the world realised that a triple-A rating from a NRSRO could mean anything but safe, Moody's is still sitting on an incredibly lucrative business. In the first quarter, it raked in nearly $200 million in operating profit on some $500 million of revenue. And the debt issuance boom continued into the second quarter.
Of course, uncertainty can be incredibly corrosive. The SEC investigation combined with pending financial regulation has made it difficult to focus on the bottom line. Until it's clear what the new legislation brings, investors are rightly cautious. Lawmakers are still hashing out reform, including whether rating agencies should be held accountable for failing to conduct reasonable due diligence in their analysis. Nonetheless, it’s hard to see Moody’s business stumbling as hard as its stock has. A host of investors can’t hold securities without a seal of approval from Moody’s or S&P. And ratings still very much matter - just look at S&P’s downgrade of Greece to junk. Until policymakers in the United States and abroad remove credit ratings from the regulatory framework, Moody’s could prove more resilient than many shareholders think.
