Moody's Under Fire

For most of its 67 years, Moody's Investment Service, one of the nation's two major bond-rating firms, enjoyed an impeccable reputation for dispassionate financial judgment. Then, last spring, Moody's downgraded its rating of bonds issued by New York State's Municipal Assistance Corp., which was created to oversee New York City's troubled finances. The drop in the rating of the original MAC bonds from A (meaning secure) to B (meaning risky) put an immediate damper on the sale of later MAC bonds, endangering the attempts to bail out New York City.

Angered state officials immediately challenged Moody's evaluation, pointing out that Standard & Poor's, the other major rating service, had continued to give MAC bonds an A-plus rating. But no one questioned Moody's motives until last week, when Felix Rohatyn, feisty, flamboyant chairman of MAC, demanded that the firm disqualify itself from evaluating MAC bonds because its political bias made it "unfit" A few days later in Washington, Assistant Secretary of the Treasury Robert Gerard cautiously agreed that if Moody's were basing its judgment on such political considerations as what the New York legislature might do next, the firm should suspend its rating of MAC bonds.

The unprecedented criticism of Moody's stems indirectly from letters written to various public officials--including Moody's President John Lockton--by Arthur Cohen, a Hollywood, Fla., businessman who holds $50,000 worth of New York City notes. Cohen was furious about the state's decision to put a moratorium on payment of principal of outstanding city notes. In one of his latest letters to Lockton, Cohen charged that New York Governor Hugh Carey "and his legislative colleagues have perpetrated what amounts to one of the biggest fraudulent acts" in U.S. history. He further claimed that challenges to the moratorium were bogged down in courts that were "highly influenced by the politicians." Lockton, who describes himself as a political independent, wrote Cohen that he believed "in the correctness of your position," and applauded his decision not to "roll over and play dead like the politicians want."

Cohen promptly sent a copy of Lockton's letter to such noted political and economic authorities as Johnny Carson, Chevy Chase and Daniel Schorr. He also mailed one to Rohatyn, who saw in it evidence that Moody's position on MAC bonds was "obviously one of political dogma." Though Moody's denies that politics was involved, MAC officials have called a meeting for this week to decide whether to sue the company or negotiate for a higher rating.

Rating services have gained enormous power in recent years, influencing the investment of millions of dollars in commercial and municipal bonds. The services' analysts investigate all financial aspects of firms or municipalities that issue bonds. The information is then studied by committees of three or four experts, who finally assign the bond's rating. Often the decisions are unanimous, but exactly what criteria are used in making these judgments is sometimes unclear. As a result, some businessmen and politicians, uneasy about how rating decisions are reached, have been calling for greater Government supervision of the rating services.

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