Moody's
Gatekeeper paid by those it gates: rates $6T of debt annually under issuer-pays model. 2008 crisis proved conflicts are structural. Still controls 40% of market with S&P, 96% Big Three total.
Moody's is a gatekeeper paid by those it gates. The company rates $6 trillion of debt annually, and that rating determines whether pension funds can buy it, what interest rate issuers pay, and often whether companies survive. The issuer-pays model means Moody's revenue comes from the same entities whose debt it evaluates—a conflict so obvious that it caused the 2008 crisis. Moody's rated nearly 45,000 mortgage-backed securities triple-A from 2000-2007; 83% were downgraded to junk by 2010. The $864 million DOJ settlement acknowledged that 'conflicts of interest' compromised ratings. Nothing structural changed. The Big Three—Moody's, S&P, Fitch—control 96% of the global ratings market, 99% of sovereign ratings. This isn't a cartel in the collusive sense; it's a natural duopoly. Most bond offerings require two ratings, but no one wants three. So S&P and Moody's split ~80%, Fitch acts as spare tire. The 1975 NRSRO designation cemented the regulatory moat—without SEC blessing, you can't compete. In May 2025, Moody's became the last Big Three to strip the US of triple-A, citing fiscal deficits. France fell to Aa3 in December 2024 over political fragmentation. These sovereign downgrades demonstrate power that contradicts the issuer-pays incentive—governments don't shop for ratings like corporations do. But the structural conflict remains: $3.8 billion in MIS revenue, 42% margins, and no mechanism to realign incentives.
The system needs exactly two dominant raters: most bond offerings require two ratings, but no one wants to pay for three. This creates a natural duopoly where S&P and Moody's split ~80% and competition is structurally impossible.
Key Facts
Power Dynamics
Assigns credit ratings to corporate and sovereign debt; ratings determine regulatory eligibility for institutional investors
A downgrade can raise borrowing costs by billions or trigger forced selling from funds restricted to investment grade; sovereign downgrades (US May 2025, France Dec 2024) demonstrate power even over governments
- SEC (NRSRO designation required to operate)
- DOJ/State AGs (can investigate for fraud, as in 2008 settlement)
- Issuers (can choose S&P or Fitch, but need at least one of the two leaders)
- Institutional investors (ultimately rely on ratings for compliance)
- SEC (regulates NRSROs, grants market access)
- S&P Global Ratings (primary competitor, near-identical market position)
- Fitch Ratings (third place, acts as alternative when needed)
- Major issuers (pay for ratings, create conflict)
- Institutional investors (use ratings for compliance, demand the service)
Revenue Structure
Moody's Revenue Sources
- Moody's Investors Service (credit ratings) 55%
- Moody's Analytics (data, software, research) 45%
Issuer-pays conflict creates reputational risk; debt issuance cycles affect MIS revenue; regulatory changes could disrupt NRSRO privilege
More diversified than pure-play ratings due to Analytics segment (96% recurring revenue); S&P Global has similar structure with Market Intelligence
Decision Dynamics at Moody's
2008 crisis: mass downgrades executed within days as subprime collapsed
US downgrade: Moody's kept AAA for 14 years after S&P downgraded (2011 vs 2025)
Sovereign ratings politically sensitive; corporate ratings faster but still require analyst committee approval
Failure Modes of Moody's
- 2008: Rated 45,000 MBS triple-A; 83% downgraded to junk by 2010; $864M DOJ settlement
- Enron 2001: Maintained investment grade until 4 days before bankruptcy
- Pre-1970s: Investor-pays model worked; switch to issuer-pays created current conflicts
- Issuer-pays conflict: revenue from those being rated
- Rating shopping: issuers seek most favorable rating
- Regulatory moat (NRSRO): barrier to entry prevents competition that might reduce conflicts
- Pro-cyclical ratings: downgrades accelerate during crisis when they hurt most
Next major credit event could expose same conflicts that caused 2008—model unchanged, only regulatory scrutiny increased
Biological Parallel
Moody's functions like an immune checkpoint—a molecular gatekeeper that determines whether cells (investments) pass or are blocked. Investment-grade ratings signal 'pass' to institutional immune systems (pension funds, insurers with regulatory mandates). But immune checkpoints can be hijacked by tumors that learn to display false 'don't attack me' signals—exactly what happened with MBS in 2008. The issuer-pays model means the checkpoint is maintained by the cells it's supposed to scrutinize. When the checkpoint fails, the financial immune system attacks healthy tissue (panic selling) or ignores malignancies (junk rated AAA).