In 1996, the Justice Department looked into similar unsolicited practices by Moody's. At about the same time, a Colorado school district sued Moody's, claiming it got an unsolicited negative rating -- a hostile rating -- because the district had refused to buy the Moody's service. The Colorado case was dismissed in 1997, after a judge ruled the rating firm's statements about the school district were opinions protected by the First Amendment. Justice took no action, but did fine Moody's $195,000 in 2001 for obstructing justice by destroying documents during its investigation.
Fitch also has been criticized for unsolicited ratings. In the late 1990s, after being dropped as a paid credit rater of Simon Property Group Inc., the largest U.S. owner of regional shopping malls, Fitch did an unsolicited rating of the company. Some mall company officials were dismayed that Fitch didn't announce that its rating was done without Simon's cooperation.
Fitch said any requirement that it disclose unsolicited ratings would "inappropriately interfere in the editorial process of the rating agencies."
When asked by The Post about unsolicited ratings, S&P's Tillman said her firm is "in the process" of changing its policies so investors will be able to tell whether they are looking at a rating done with a borrower's cooperation. Moody's said the last time it issued an unsolicited rating without identifying it as such was in 2000. And in October, the company began to publicly identify unsolicited ratings.
Greg Root, a former official of the Canadian rater Dominion Bond Rating Service Ltd. who also worked at S&P and Fitch, said that making such disclosure is important because, "when a rating agency does a rating, there's the impression there's a formal due diligence and that they get non-public information. Investors assume there's a strong ongoing dialogue."
Whether an unsolicited rating is a form of coercion to earn fees is another matter, Root said: "It's always a fine line."
A Hard Sell
Moody's danced along that line when it began its push into Europe in the late 1980s, according to former company officials. It began writing letters to European companies, saying it was planning to rate them. Moody's invited the companies to participate in the ratings process; however, if they didn't, the credit rater said it felt it had adequate public information to do a rating anyway.
"That was the hook. That's where we were trying to get into the door and send them the bill," said W. Bruce Jones, now a managing director at Egan-Jones Ratings Co ., a small rival of Moody's. "The implied threat was there."
Moody's took a similar approach in mid-1998 when it approached Hannover, the big German insurance company that provides insurance for other insurance companies, helping to spread the risk in the event of a major catastrophe.
Hannover had become one of the largest reinsurers in the world, with about half of its business in the United States. Insurers must be able to demonstrate to outsiders that they have the financial strength to make good on their policies. Hannover was already paying fees for that purpose to S&P and A.M. Best Co., a leader in the insurance rating industry. They had both given Hannover high ratings.
"So we told Moody's, 'Thank you very much for the offer, we really appreciate it. However, we don't see any added value,' " said Herbert K. Haas, Hannover's chief financial officer at the time.
As Haas recalls it, a Moody's official told him that if Hannover paid for a rating, it "could have a positive impact" on the grade.
