Rating agency Moody’s cuts Toyota before hearing

 Moody's

One of the world’s preeminent rating agencies, Moody’s, announced Thursday that they are cutting Toyota’s credit rating due to all the issues surrounding the auto manufacturer. This move is not unexpected because Toyota has been and will be under a lot of pressure as the value of their vehicles are not what they used to be before their quality concerns became common knowledge. What is interesting however, is the timing of Moody’s announcement.

On Friday, Moody’s will be testifying at a hearing on Capitol Hill before a senate committee which is looking in to their role in the financial crisis. I want to first explain what Moody’s actually does and then get into the Toyota announcement.

Moody’s is a rating agency which, like other major rating agencies is tasked with labeling various investments with a rating to show the correct level of risk. These ratings can be BBB for risky investments to AAA for the most secure investments and everything in between. The problem they had in this past financial crisis was that some the shady investments that were effectively junk, received a AAA rating from Moody’s which meant that Moody’s appraised the investments as the safest possible bets. Many of these investments ended up going to $0 within a few months of the rating. An investment that receives such a high rating should almost never go to $0 and certainly not so soon after it was appraised.

Therefore, it seems apparent that Moody’s acted at least unethically, if not illegally because they received payment from the investment companies for AAA ratings- an obvious conflict of interest. So Friday’s senate hearing is not likely to produce good news for Moody’s and the view the company will have in the public’s eyes will be taking a hit. 

Enter Toyota. Right now, there is no piñata America would rather beat than Japanese car maker Toyota (not undeserving by any means). It appears that cutting Toyota’s credit rating a day before they are set to testify before the senate is an attempt to lay a positive tone and foundation in the minds of Americans. If it turns out that Moody’s played a big role in the financial crisis then, it won’t matter how much they cut Toyota’s rating because nothing will help them. However, you have try whatever you can to attempt to sway public opinion and beating on Toyota is becoming a favorite pastime in North America.

Again, I am not saying that criticism regarding Toyota including cutting their credit rating is wrong, in fact, it is fair and correct. However, the timing Moody’s has used in their decision is duly noted.