McGraw-Hill: Collateral Damage
By Dan Freed 09/24/09 - 08:10 AM EDT
NEW YORK (TheStreet) -- Moody's Investors Service's (MCO Quote) stock has gotten clobbered in recent days, while shares of McGraw-Hill (MHP Quote) are holding up far better, a trend that may not continue for long.
The big selloff in Moody's shares came Wednesday following a report in The Wall Street Journal that a former analyst at the ratings giant is accusing it of knowingly giving inappropriately high ratings and has taken his concerns to Congress. The analyst, Eric Kolchinsky, is scheduled to testify before Congress on Thursday. Moody's shares fell 8.4% on more than twice their average volume Wednesday, while McGraw Hill shares dropped 1.7% on average volume.
The claims are especially damning because a recent high-profile lawsuit against the ratings agencies hinges in part on the question of whether Moody's and McGraw-Hill's ratings unit Standard & Poor's knowingly inflated the ratings on certain securities. The plaintiffs, Washington state's King County and Abu Dhabi Commercial Bank, need to prove there was intentional inflation of ratings to stand a chance of winning. The case has attracted special attention because it marks the first time a judge rejected the agencies' longstanding use of the First Amendment to defend against fraud claims.
I have argued that Moody's and S&P will eventually recover from this selloff, which is driven partly by a drop in revenue at both companies but mostly by the overhang of legal questions and the possibility of losing the government-approved oligopoly they share with Fitch. Betting on legislators making trouble for companies that have been central to the financial system for decades is like betting against JPMorgan Chase (JPM Quote) on the theory that Jamie Dimon will eventually retire. Yes, eventually, someday, but who's to say the bank won't continue to dominate?
