Moody's repackages their own data, calls it "research"

March 10, 2009 in Finance

Moody's - they used to be a rating agency - has announced they will publish a monthly list called the "Bottom rung," highlighting corporations most likely to default on their debt.

The Bottom Rung, which Moody's will update monthly, represents roughly the riskiest 15% of all companies it tracks.... Moody's estimates about 45% of Bottom Rung companies will default on debt in the next year.

Sounds like rather specific figures from a company whose chief competitor couldn't distinguish a firm from a farm. How exactly did they crunch these numbers?

To compile the list, Moody's chose the companies with the lowest credit ratings -- those rated B3 or below -- whose ratings were either negative or under review.

So essentially, Moody's took their own, existing research, compiled it (which they surely do anyway), gave it a catchy name and republished it.  The only conceivable reason to do such a thing is to highlight the negative ratings they have given the companies on the list, as if to say, "Look how bad they are! Look how good we must be by comparison!"  This is called fear mongering.  It's also a veiled attempt to profit from the demise of a company.  You may have read about how angry short selling and CDS are making our esteemed leaders; I'm not sure this is much different.  Oh, except for the part where it's not necessarily grounded in reality.

And how did they come up with that 45% number?

Applying that methodology retroactively to 2008 would have yielded about 157 companies, Moody's officials said, 60 of which would have eventually defaulted.

Ok! 60/157 = 38%.  So if we had paid attention to Moody's in 2008 (which we did not), 38% of their "most risky" companies would have defaulted.  This year they expect slightly more - 40% feels too low, 50% feels too high - of such companies to default.

Moody's used to be like the neighbor who lived next door to a serial killer, who is interviewed the day after the police seige and gets quoted saying, "He always seemed like such a nice guy."  Except now  they realize how stupid that quote looks on the front page of the WSJ and are preemptively attacking their new neighbor - who just moved in, can't quite make mortgage payments and feed his kids too, but is really trying - and telling every reporter in sight that "this guy might be another killer!"

The amazing thing is that people are treating this "Bottom Rung" like new information, rather than a repackaging of demonstrably poor research!  Eastman Kodak, one of the companies named in this monthly newsletter, says

Any speculation, however informed, suggesting that Kodak is less than financially sound, is irresponsible.

Irresponsible speculation?  Please.  This is Moody's.

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