Moody’s Investor Service began in 1900 as the advisory business dream of John Moody, a self-taught entrepreneur who had a knack for journalism, statistics and economics. He began publishing “Moody’s Manual of Industrial and Miscellaneous Securities,” which covered statistics on stocks and bonds from financial institutions, utilities, food companies, mining, manufacturing and government agencies. Moody’s sold his business in 1907, when the stock market crashed, but he returned in 1909, offering investors advisory services and analysis of security values. It was this move that defined Moody’s innovation to become the first person to rate public market securities.

In this unruly sea of financial transactions and market uncertainties, Americans look to an investing service like Moody’s for guidance. With over 1,000 independent financial advisors, Moody’s represents a large body of professional economic experts. In their latest prediction, the financial market will continue to suffer throughout 2010. This month, Moody’s VP Craig Emrick stated, “We do not believe asset quality deterioration for the U.S. banking industry has reached its peak, and we therefore anticipate multiple quarters of losses for a large number of rated banks.” He added that 44% of the banks they rated showed net losses this year, but some residential real estate transactions have “caught up and surpassed [expectations] by some measures.”

Of course not all advisory services are right 100% of the time and investors do lose money on AAA rated financial products — sometimes a lot of money. More than one investor has appealed to district judges, complaining that they were misled by “deceptive ratings.” In the past, Moody’s has countered this argument that their opinions and investment advice are protected by First Amendment/Free Speech rights. On September 2nd, in a landmark decision, U.S. District Judge Shira Scheindlin rejected these First Amendment claims and ruled that investors are allowed to sue these companies. “It reminds me of when the courts finally ruled a tobacco victim could sue a cigarette company,” said David Einhorn, 40, a hedge fund manager who is betting against Moody’s Investor Service. “The damage in this case is large, relative to the ability to pay.” Even so, Moody’s spokespeople said they are “confident” that this judgment will turn out well.

Moody’s Investor Service does not have an entirely clean slate, however. One of the problems, NY Times writer David Gillen points out, is that “Dominant agencies like Moody’s and Standard & Poor’s are paid by the companies whose securities they are evaluating. Under this so-called issuer-pay model, the industry maximized its profits at investors’ expense, and, in the process, imperiled the entire financial system” (6/4/09). In the future, we are likely to see a shift in advisory services to improve the legitimacy of the ratings to a more unbiased system.

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