Transcripts

Moody's Chairman and CEO Ray McDaniel Revamps Its Revenue Forecast

JEFF YASTINE: Moody's cut its 2008 earnings and revenue forecast today on the belief problems in the credit market will last longer than expected. It's the latest blow to the world's second largest credit rating firm, which along with its rivals, has come under fire for failing to warn investors sooner about the risks of the sub-prime related securities it rated. I spoke with Moody's Chairman and CEO Ray McDaniel this morning, and began by asking him if the company and its credit rating system failed investors when they needed it most.

RAYMOND McDANIEL, CHMN & CEO, MOODY'S; The rating system has a very long track record. It is proven to be highly predictive over long cycles, through different business cycles in all geographies around the world. It certainly does not mean that we have flawless foresight. And it is difficult to expect any prediction of the future to anticipate all contingencies, all potential eventualities, and make 100 percent correct predictions. This has been a difficult period and Moody's understands this has been a very difficult period for users of our ratings in certain categories of ratings.

YASTINE: Some would say what good is a rating system though if you can't trust it?

McDANIEL: Well, they're absolutely correct. They do need to be able to depend on our ratings. We can't have a system in which there are large numbers of ratings moving in large rating transition paths rapidly or that erodes confidence in the system. And if our performance that has -- has been shown in these troubled areas coming out of the U.S. housing sector is a signal of future performance, I think people are right to question their ability to rely on the ratings. That's not going to be the case, at least not at Moody's. We know that we have to restore some credibility in these areas. We have to demonstrate why there should be confidence in our ratings. We've already taken a number of actions to try and assure that that is going to be the case. And we are going to make sure that again the rating system deserves the confidence that has been placed in it historically. And that's going to take us some time.

YASTINE: The other criticism about the ratings agencies is that there is a fundamental conflict in that the ratings firms are getting paid to rate securities by the investment banks, which are then going out to sell those securities.

McDANIEL: The short answer to that is not that we don't have conflicts of interest. Of course we do. We have conflicts of interest that must be managed properly. And that oversight authorities or the marketplace can see we manage properly. It doesn't matter whether we are paid fees by issuers of securities or whether we are paid fees by investors in those securities. As long as we are paid by any party that has a financial stake in the outcome of our opinions, they are going to be motivated from time to time to try and persuade us that their point of view about our opinion is correct. And so I would not defend Moody's practices and processes on the basis that there are no potential conflicts of interest. There are. They must be managed properly. They must be managed transparently, so that there is the ability to judge whether we have -- have got the processes and practices in place that demonstrate a prudent professional, appropriate management of the rating system. And I think we do.

YASTINE: Ray McDaniel, Moody's, thanks.

McDANIEL: Thank you very much