Moody Blues: Insurance Regulators May Bypass Rater After Snub

Last Updated Sep 21, 2009 7:31 PM EDT

Once known for its creampuff reputation, the National Association of Insurance Commissioners is mad as hell and not going take it anymore.

Moody's Investors Service, one of the big three credit rating agencies, apparently will not attend the September 24 hearing that the NAIC is holding to review the raters' dismal performance during the mortgage meltdown. Not smart. The NAIC, collectively, represents the 50-plus insurance commissioners who run the U.S. insurance system, so they are not to be trifled with.
And the most important state, New York, where many of the biggest insurers like American International Group and MetLife are regulated, is going one step further. The Empire State's Deputy Insurance Commissioner Hampton Finer is asking whether Moody's should have its authorization pulled.

To put it bluntly, Moody's has made a big mistake. Insurance companies hold about $3 trillion worth of securities, and nearly all of them have to be rated to make sure they are secure. That's a big part of a rater's revenue stream.

But these securities don't have to be rated by Moody's, or for that matter, by Standard & Poor's or Fitch Ratings, the other two big rating agencies. Each of them takes fees from the people they rate, an obvious conflict of interest. And all of them messed up; telling the world that the mortgage instruments based on fake promises and phony prayers should have been rated Triple A.

There are several days of reckoning coming for the rating agencies. Senate Banking Committee Chairman Christopher Dodd is investigating them. And so is the Securities and Exchange Commission.

And, if the NAIC doesn't like what it hears on September 24, it could recommend newer raters, such as Egan-Jones, that don't take money from the people they rate. Tough times for the Big Three raters are in store from those who got hurt or embarrassed during the mortgage crisis.

But at least Standard & Poor's and Fitch are willing to stand up and take their lumps. Moody's is just running away.

  • Ed Leefeldt

    Ed Leefeldt is an award-winning investigative and business journalist who has worked for Reuters, Bloomberg and Dow Jones, and contributed to the Wall Street Journal and the New York Times. He is also the author of The Woman Who Rode the Wind, a novel about early flight.