Why Moody's and McGraw-Hill Shares Were Decimated

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of ratings agencies Moody's (NYSE: MCO  ) and McGraw-Hill (NYSE: MHFI  ) , the owner of Standard & Poor's, both tumbled as much as 14% on Tuesday following the filing of a lawsuit by the Department of Justice against Standard & Poor's.

So what: The lawsuit from the DOJ claims that Standard & Poor's knowingly inflated its ratings on risky mortgage assets despite blatant evidence of falling home prices and is one of the primary causes for the credit crisis in 2008. The DOJ is apparently seeking a minimum of $5 billion in damages. Six separate state attorneys general and the attorney general of the District of Columbia have filed, or are expected to file, similar civil suits against Standard & Poor's. As of now, McGraw-Hill has denied the claims as "meritless."

Now what: There are lawsuits, and then there are lawsuits from the DOJ. DOJ lawsuits usually end with some sort of compensation heading the government's way, so it's very easy to see why McGraw-Hill is headed lower, as this could be a gray cloud that hangs over the company for months, if not a year or two. Likewise, Moody's isn't out of the woods and may continue to deal with rumors that it's next. This is an ugly situation that I'd just as soon avoid altogether.

Craving more input? Start by adding Moody's and McGraw-Hill to your free and personalized Watchlist so you can keep up on the latest news with the company.

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