Moody's allegedly hastened the credit crisis earlier in the decade by assigning top ratings to mortgage-backed securities that deteriorated later. Moreover, it is being probed by regulators worldwide, with several ongoing reviews in Europe for rating a European debt product, constant proportion debt obligations (CPDOs), at a higher-than-merited AAA.

According to the Wall Street Journal, Eric Kolchinsky a former analyst with Moody's Corp. (MCO) has accused Moody's Investor Service of issuing inflated ratings and will make the matter public by taking it to U.S. congressional investigators.

Moody's issued a high rating to a debt security, although it was planning to downgrade assets backing the securities. The Journal said that Moody's declined to make any comment but has suspended Mr. Kolchinsky, as he refused to cooperate with the investigation into the issues raised. Kolchinsky is scheduled to testify on the ratings firm reform before the House Committee on Oversight and Government Reform.

Earlier, Swiss banking giant UBS AG (UBS) was ordered to pledge its assets or provide bonds worth $35 million after reports claimed that top credit ratings agencies had committed a securities fraud by providing insider trading information to the bank. UBS had entered a deal to sell its investment-grade collateralized debt obligation (CDO) notes in 2007 with the prior knowledge that the securities were about to be downgraded.

The proceedings revealed that the rating agencies Moody's and Standard & Poor's provided insider information to UBS regarding their impending decision to downgrade some of the CDOs the bank was selling. The credit crunch led the securities to default only months after they were sold and UBS used the situation to its advantage.

The UBS litigation reflects a negative sentiment that has built up against large credit rating agencies for sharing furtive connections with big investment banks. This would certainly hurt Moody's goodwill and highlight the fact that rating agencies can be bought. The integrity of the company and its ratings are in question.

The SEC has proposed rules for credit rating agencies to improve credit rating practices and transparency in ratings. The SEC has designed various measures to stop the practice of corporations seeking to buy favorable ratings by negotiating fees with raters.

Although Moody's is not ultimately compensated on the accuracy of its ratings, we believe it will face large penalties. We believe that the rating agencies are hampered by conflicts of interest and the employees lack independence to give a fair rating. The major credit rating agencies under SEC scrutiny would be Moody's, McGraw-Hill's (MHP) Standard & Poor's and Fitch Ratings.

Recently, Insurance regulators have approved CMBS ratings from Realpoint LLC for commercial mortgage-backed securities, a move aimed at providing an alternative to the major ratings agencies. But the question still remains whether this is enough to stop such malpractices. SEC will have to take strict actions against these rating agencies.