On August 28, 2018, the Securities and Exchange Commission announced that Moody’s Investors Service agreed to pay “…a total of $16.25 million in penalties to settle charges involving internal control failures and failing to clearly define and consistently apply credit rating symbols.”
Let’s put this most recent “penalty” into perspective. The mortgage market ratings fiasco peaked in the year of 2006. It was at this point in time that the truly low quality debt (the kind that anyone could easily identify as garbage) started to collapse.
In 2006, it is estimated that $6 trillion of mortgage-backed securities were issued (1). According to multiple sources, Moody’s has a 40% market share of the ratings market (2). This means that Moody’s issued ratings on approximately $2.4 trillion of the $6 trillion of mortgage backed debt.
Assuming that only ⅓ of the $2.4 trillion were wrongly rated, this would mean that the $16.25 million PLUS the January 17, 2017 fine of $865 million (3) equaled 0.12% of the $720 billion in alleged criminal conduct that is worthy of “penalizing” from the SEC. All this in only the year of 2006.
True to form, Moody’s Investor Service added that they “…did not admit or deny the SEC’s charges.” At 0.12% of the alleged 2006 value of purported mis-ratings, that’s like saying they were making a charitable donation (or bribe, whichever fits best) to the SEC.
sources:
1."Through the mid-2000s, RMBSs and CDOs were attractive investments because even the senior tranches (those rated AAA) offered higher returns than investments in AAA corporate bonds. They also grew explosively during the 2000s. In 2006, the value of mortgage-backed securities in the United States was more than $6 trillion (SIFMA 2007). As of March 2008, Freddie Mac and Fannie Mae alone had issued $4.5 trillion in RMBSs (Yoon 2008). The global market for CDOs was approximately $1.5 trillion by the end of 2005 (Celent 2005) (Rom, Mark Carl. The Credit Rating Agencies and the Subprime Mess: Greedy, Ignorant, and Stressed? Public Administration Review.Jul-Aug 2009. p. 643.)."
2. Steven Scalet and Thomas F. Kelly. The Ethics of Credit Rating Agencies: What Happened and the Way Forward. Journal of Business Ethics. December 2012. pp. 478.
3. Matt Scully and David McLaughlin. Moody’s Reaches $864 Million Subprime Ratings Settlement. Bloomberg. January 13, 2017. accessed August 31, 2018. https://www.bloomberg.com/news/articles/2017-01-13/moody-s-to-pay-864-million-to-settle-subprime-ratings-claims
4. Kool G Rap & D.J. Polo. Live and Let Die. Crime Pays. https://www.youtube.com/watch?v=CW5bVNntye4 accessed August 28, 2018.