Open AccessMoody’s Bond Ratings in Historical Perspective： Their Purpose and Performance
Author(s) -
Ken Berry
Publication year - 2020
Publication title -
financial forum
Language(s) - English
Resource type - Journals
ISSN - 2251-2659
DOI - 10.18282/ff.v0i0.695
Subject(s) - default , investment (military) , order (exchange) , subprime crisis , great depression , perspective (graphical) , bond , bond credit rating , economics , depression (economics) , point (geometry) , investment banking , technical analysis , actuarial science , financial crisis , financial economics , financial system , finance , political science , keynesian economics , credit risk , computer science , law , mathematics , artificial intelligence , geometry , politics , credit reference
The securities rating industry has been heavily criticized for its subprime mortgage ratings that performed so poorly during the 2007-9 subprime crisis. This chapter traces the history of Moody’s bond ratings since their inception in 1909. The stated purpose of the ratings was as an aid in investment analysis with the large number of U.S. securities outstanding at the time. However, evidence is reviewed that the Great Depression was a turning point for ratings, with a switch in focus from investment analysis to default analysis. The ratings during this period were compared with a structural default analysis in terms of their ability to rank order defaults that occurred during the Great Depression. The conclusion is that advances in finance has created technologies that tend to outdate the ratings technology.