Debt rating alphabet soup can spell disaster

13.05.10

The process itself dates back to John Moody.

A self-taught investment guru at the turn of the 19th century, Moody published a book of his views on various stocks and bonds. Full of technical analysis that is commonplace today but was then ahead of its time, Moody's Manual of Industrial and Miscellaneous Securities proved popular with investors and quickly sold out.

When the stock market crashed in 1907, Moody's lacked enough capital to survive the downturn, so he had to sell his manuals business. Needing a new revenue source, he hatched the idea of selling an analysis not of individual securities at any given time but rather their overall credit-worthiness.

Essentially, he looked under the hoods of various debt instrument sellers, and gauged how likely they were to default on their loans, based on their payment history and the general state of their finances.

He borrowed the letter-based system of the mercantile agencies that monitored credit-worthiness of individuals (similar to credit agencies TransUnion and Equifax today) by assigning them a letter grade.

Source: CBC.ca

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