Moody’s stock is plunging today as it discloses that it’s in trouble with the SEC:
Late on Friday, rating agency Moody’s disclosed in its quarterly 10-Q filing that it had received a Wells Notice from the SEC.
(A Wells Notice is a notification of intent to recommend that the US government pursue enforcement proceedings, and is sent by regulators to a company or a person)
That notice, which the SEC issued in March 2010, is linked to the investigation by one Sam Jones, then of the FT Alphaville parish, into the company’s modelling errors on CPDOs.
We’ve been discussing the ratings agencies a bit lately, and as should be clear one of the main things the agencies are selling is their regulatory status. In principle, Moody’s could be decertified as a Nationally Recognized Statistical Rating Organization, in which case it could still rate securities in exchange for money but its business model would need to be founded on the idea that its ratings are very insightful. As an NRSRO getting a good rating from Moody’s has a specific value in terms of helping your bank or pension fund comply with various legal obligations.