SEC rebukes Moody's over integrity of its ratings

The Sacramento Bee,  by Kevin G.Hall, McClatchy Newspapers, Oct. 1, 2011

WASHINGTON – The Securities and Exchange Commission rebuked Moody's Investors Service on Friday for failings that it said "may compromise" its compliance office, which is supposed to ensure the integrity of the firm's work.

It was the first SEC report on credit ratings agencies since the commission was given stronger oversight authority over them. The staff report followed examinations and audits of 10 certified raters. The report doesn't name Moody's, but makes it abundantly clear that Moody's is the embattled company that's being criticized.

Moody's has been under fire for several years since McClatchy Newspapers and others reported that it sacrificed quality analysis in exchange for profiting from the Wall Street investment banks that nearly brought down the U.S. financial system in 2008. A Senate panel found last year that more than 90 percent of Moody's AAA ratings on complex mortgage bonds later proved wrong.

All that happened because of a hamstrung compliance office, congressional investigators and a special inquiry commission concluded. Friday's report suggests that more needs to be done to clean up compliance at Moody's.

Ratings are a signpost for investors of the risk of default on bonds. Moody's poor performance on rating complex bonds sparked numerous lawsuits, along with probes by the SEC and the Department of Justice. No ratings agency official has faced criminal charges to date.

Before the financial crisis, there was no direct regulation over ratings agencies. A revamp of financial regulation in July 2010 gave the SEC that power, and Friday was its first comprehensive examination of companies that were key sparks of the financial crisis.

Moody's took the criticism in stride.

"Moody's welcomes the SEC's constructive recommendations to our industry," said Michael Adler, a spokesman in New York.

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