In 2007, Moody's slapped a triple-A rating on Abacus, a portfolio of Goldman Sachs
It turns out Abacus was barely worth the paper it was written on. Moody's eventually downgraded the collateralized debt obligation after it had already lost much of its value. According to the SEC, investors lost $1 billion on the deal.
Moody's credit assessment of AIG
Moody's defended the rating, saying the likelihood of a government bailout played an important role in the decision.
AIG eventually did receive a bailout. Lehman Brothers, on the other hand, wasn't as lucky. The financial giant declared bankruptcy, prompting Moody's to finally cut its rating on the company to junk. Gee, thanks for the heads-up, guys.
The bottom line
If you believe there is more financial turmoil on the horizon, then don't wait on a Moody's downgrade before moving cash to the sidelines. By the time such a downgrade occurs, it will most likely be too late.
Fool contributor Adam J. Crawford does not own shares of any company mentioned in this article. Motley Fool newsletter services have recommended buying shares of Moody's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.