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What: Shares of Moody's (NYSE:MCO) were getting a ratings boost from investors today, climbing as much as 11% after reaching a settlement over two mortgage bond lawsuits that gave the ratings industry an across-the-board boost. Standard & Poor's parent McGraw-Hill (NYSE:SPGI) was also up as much as 6% today.
So what: The lawsuits that were resolved came from Abu Dhabi Commercial Bank and King County in Washington state, which had accused the agencies of hiding risks related to subprime mortgage bonds. Each agency agreed to pay $225 million to settle the allegations, a relative pittance considering that their AAA stamp of approval on these instruments was a major catalyst for the financial crisis.
Now what: The settlements certainly constitute a step forward for the ratings agency, but the debacle also serves as a reminder of their futility and incompetence. One lesson of the financial crisis would seem to be that our ratings system needs an overhaul, as these agencies are paid by the very corporations they're rating -- the definition of a corrupt system. Short-term, these companies will probably move with the market, as IPOs and other ratings material tends to increase with a bull market, but you have to expect more regulation to be on the way should another gross oversight such as the one that brought on the housing bubble and collapse come along. You can keep track of Moody's and McGraw-Hill by adding them to your Watchlist here.
Fool contributor Jeremy Bowman has no position in any stocks mentioned. The Motley Fool recommends Moody's. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.