Moody's profit tumbles, to be sued by Connecticut

By Jonathan Stempel

NEW YORK (Reuters) - Moody's Corp (NYSE:MCO - News), the parent of Moody's Investors Service, said quarterly profit fell 48 percent, as the global credit crisis caused demand to shrink for mortgage bonds and collateralized debt obligations.

Though results topped forecasts, Moody's shares gave up some early gains after Connecticut Attorney General Richard Blumenthal said he plans to sue Moody's and its main rivals, McGraw-Hill Cos (NYSE:MHP - News) Standard & Poor's, and Fimalac SA's (Paris:LBCP.PA - News) Fitch Ratings, for alleged "deceptive and unfair practices costing taxpayers millions of dollars."

Second-quarter net income for New York-based Moody's, whose largest investor is Warren Buffett's Berkshire Hathaway Inc (NYSE:BRK-A - News; NYSE:BRK-B - News), fell to $135.2 million, or 54 cents per share, from $261.9 million, or 95 cents, a year earlier.

Moody's said profit excluding items was 51 cents per share. On that basis, analysts on average expected 47 cents per share, according to Reuters Estimates. Revenue fell 25 percent to $487.6 million, topping the average $465.7 million forecast.

"They beat the numbers in pretty much all categories," said Edward Atorino, an analyst at Benchmark Co in New York. "I think we're bouncing along the bottom. The third quarter is starting pretty slow, but we're at the bottom of a trough."

Results were weakened by a 56 percent plunge in revenue from CDOs and other structured products, including such asset classes as residential mortgage-backed securities, commercial real estate finance and credit derivatives. In the United States alone, structured finance revenue fell 67 percent.

Expenses declined 10 percent as Moody's cut jobs and reduced incentives and stock-based compensation.

CRITICISM

Moody's and its rivals have faced criticism from investors, politicians, regulators and smaller rivals for feeding the housing boom and crisis by assigning high ratings to risky debt in the pursuit of fees, only to downgrade those ratings later.

The company's ratings are nevertheless still often necessary because many investors won't buy unrated debt.

Revenue rose 13 percent in the municipal debt rating unit and held steady in financial institutions ratings. Moody's Analytics, which helps investors value their holdings, had a 14 percent revenue increase.

Moody's still expects 2008 profit of $1.90 to $2.00 per share, with revenue down by a mid- to high-teens percentage. Analysts expected profit of $1.92 per share for the year.

On Tuesday, McGraw-Hill posted a smaller-than-expected 23 percent decline in quarterly profit, and also affirmed its 2008 earnings forecast.

In morning trading, Moody's shares were up 58 cents at $36.73. They traded as high as $38.50, but fell back after Blumenthal announced the planned lawsuit.

PROBES

Moody's, S&P and Fitch have suffered as the housing slump and credit crisis caused demand to disappear for a wide variety of debt, and thus ratings.

Financial companies have absorbed well over $400 billion of write-downs and credit losses since the credit crunch began.

Moody's in May announced a probe into whether it wrongly assigned "triple-A" ratings to complex European products known as constant proportion debt obligations (CPDOs), and failed to change the ratings for nearly a year after finding the error.

The same month, Moody's replaced ChIef Operating Officer Brian Clarkson, who drove its expansion in structured finance. In July, Moody's removed structured finance chief Noel Kirnon.

Also in July, the U.S. Securities and Exchange Commission said evidence showed that one rating agency let analysts take part in fee discussions with issuers, and another let analysts weigh whether their ratings could trigger client defections.

Berkshire had a 19.6 percent stake in Moody's as of March 31, according to Thomson ShareWatch.

Through Tuesday, Moody's shares had fallen 52 percent from a peak of $76.09 in February 2007.