Moody's Got 53 Percent Profit Margins Rating Dicey CDOs

For a moment of clarity in understanding just how all the watchdogs in finance took a siesta, read Gretchen Morgenson's long takeout in The New York Times this Sunday about how ratings agency Moody's went so far astray from its traditional role.
The reason? Very simple. Money.

Here's what she reports:

"By the time Moody's became a public company in 2000, structured finance had become its top source of revenue. Employees in this unit rated bundles of assets like credit card receivables, car loans and residential mortgages. Later they rated collateralized debt obligations, or C.D.O.'s, yet another combination of various bundles of debt.

"Moody's could receive between $200,000 and $250,000 to rate a $350 million mortgage pool, for example, while rating a municipal bond of a similar size might have generated just $50,000 in fees, according to people familiar with Moody's fee structure.

"A standard of profitability at many companies is its operating margin, which measures how much of its revenue is left over after it pays most expenses. While operating margins at Moody's were always enviable -- in 2000 they stood at 48 percent -- they climbed even higher as revenue from structured finance rose. From 2000 to 2007, company documents show, operating margins averaged 53 percent.

Even thriving companies like Exxon and Microsoft had margins of 17 and 36 percent respectively in 2007. But Moody's and its counterparts were not founded to be profit machines."

I don't know of many enterprises that can generate 53 percent in operating margins, except for perhaps some little, low-budget televeisions out in the country somewhere. Morgenson hits the problems with Moodys and Standard & Poor's and Fitch's right on the head here.

Financial credit watchdogs should not be raking in that level of dough based on the ratings they hand out to the companies they are supposed to be watching. The SEC was supposed to consider this but in their latest attemp, commissioners did nothing.

It's about time.