Financial crisis of 2007–2008

The global financial crisis of the late 2000s brought increased scrutiny to credit rating agencies' assessments of complex structured finance securities. Moody's and its close competitors were subject to criticism following large downgrade actions beginning in July 2007.^[40][41] According to the Financial Crisis Inquiry Report, 73% of the mortgage-backed securities Moody's had rated triple-A in 2006 were downgraded to junk by 2010.^[42] In its "Conclusions on Chapter 8", the Financial Crisis Inquiry Commission stated: "There was a clear failure of corporate governance at Moody’s, which did not ensure the quality of its ratings on tens of thousands of mortgage-backed securities and CDOs."^[43]
Faced with having to put more capital against lower rated securities, investors such as banks, pension funds and insurance companies sought to sell their residential mortgage-backed securities (RMBS) and collateralized debt obligation (CDO) holdings.^[44] The value of these securities held by financial firms declined, and the market for new subprime securitizations dried up.^[45] Some academics and industry observers have argued that the rating agencies' mass downgrades were part of the "perfect storm" of events leading up to the financial crisis in 2008.^{[44][46][47][48]}
In 2008, a study group established by the Committee on the Global Financial System (CGFS), a committee of the Bank for International Settlements, found that rating agencies had underestimated the severity of the subprime mortgage crisis, as had "many market participants". According to the CGFS, significant contributing factors included "limited historical data" and an underestimation of "originator risk" factors. The CGFS also found that agency ratings should "support, not replace, investor due diligence" and that agencies should provide "better information on the key risk factors" of structured finance ratings. In October 2007, Moody's further refined its criteria for originators, "with loss expectations increasing significantly from the highest to the lowest tier". In May 2008, Moody's proposed adding "volatility scores and loss sensitivities" to its existing rankings.^[20][49] Although the rating agencies were criticized for "technical failings and inadequate resources", the FSB stated that the agencies' "need to repair their reputation was seen as a powerful force" for change.^[4] Moody's has in fact lost market share in certain sectors due to its tightened rating standards on some asset-backed securities, for example the commercial mortgage-backed securities (CMBS) market in 2007.^[50]
In April 2013, Moody's, along with Standard & Poor's and Morgan Stanley, settled fourteen lawsuits filed by groups including Abu Dhabi Commercial Bank and King County, Washington. The lawsuits alleged that the agencies inflated their ratings on purchased structured investment vehicles.^[51]
In January 2017, Moody's agreed to pay nearly $864 million to settle with the Department of Justice, other state authorities and Washington. A fine of $437.5 million would be paid to the DOJ, and the remaining $426.3 million penalty would be split among 21 states and the District of Columbia.^[52][53]

Global Credit Research

In March 2013 Moody's Investors Service published their report entitled Cash Pile Grows 10% to $1.45 Trillion; Overseas Holdings Continue to Expand in their Global Credit Research series, in which they examined companies they rate in the US non-financial corporate sector (NFCS). According to their report, by the end of 2012 the US NFCS held "$1.45 trillion in cash," 10% more than in 2011. At the end of 2011, US NFCS held $1.32 trillion in cash which was already a record level.^[54] "Of the $1.32 trillion for all the rated companies, Moody's estimates that $840 billion, or 58% of the total cash, is held overseas."^[55]