What is the basis on which Moody's assess (upgrades/downgrades) and rates companies?

Question

What is the basis on which Moody's assess (upgrades/downgrades) and rates companies?

Answer 1

From the recent mortgage back-securities crisis, they don't have much basis. Many of the failed securities were rated AAA (the highest rating) by Moody's and other rating agencies, so they're basically full of cr@p.

But besides that, your question is too simple. Moody's and other rating agencies use multiple rating assessment methods depending on the type of security and company. Also, they don't really rate companies, they rate the financial instruments that those companies produce.

Moody's has ben particularly bad in rating CDOs (Collateralized Debt Obligations) and CPDOs (Constant Proportion Debt Obligations) which often are made up of a labyrinth of poorly understood mortgage loan packages.

If your question is really directed at how the mortgage finance crisis happened from a layman's perspective, I highly recommend listening to "355: The Giant Pool of Money" on the podcasted radio show "This American Life". It has a good explanation of how the whole mess happened.

Answer 2

Their mood?

(Seriously, who knows...they have made too many serious mistakes to be take too seriously)