Financial History Issue 112 (Winter 2015) | Page 34
Genesis of the
“Big Three”
Credit Rating Agencies
By Lesyk Voznyuk
The “Big Three” credit rating agencies — Moody’s, Standard and Poor’s and
Fitch — were all founded on the principle
that investors would pay for information
that would protect them from loss. And all
three first began as publishers of business
information in the early 20th century, but
branched out into securities rating as the
business information industry developed.
Economic forecasting also boomed early
in the 20th century, and it was the combination of business statistics and principles
of forecasting that gave birth to the credit
rating business.
The origins of the credit rating agencies
date to the 19th century. During the mid1800s, railroads were the largest corporations in the United States. The railroad
business was incredibly capital intensive
and, as a result, the railroad companies
issued securities — a wide variety of notes,
bonds and hybrid debt-equity instruments — to finance the construction and
maintenance of their infrastructure. Information about the health of railroad companies, particularly their financial health,
was fragmented, providing an opportunity for pioneers in the field of business
information and analysis.
One of the first of these was Maine
lawyer Henry Varnum Poor. In 1849, Poor
published the American Railroad Journal
and followed it up with A History of the
Railroads and the Canals of the United
States in 1860. Then, with the help of his
son, Poor founded the H.V. and H.W.
Poor Company, which published business
information for investors. In 1868, it published its highly-successful Manual of the
Railroads of the United States and updated
it annually thereafter. For a brief stint in
1890–1893, Poor also published a handbook on the securities of industrial companies. The lack of information about industrial companies provided an opportunity
for future entrepreneurs as the number of
publicly-held industrial companies grew.
The first of those entrepreneurs was
John Moody, whose passion for transparency in business and information for
investors dated back to his childhood.
Moody’s father lost vast sums in the stock
market in the Panics of 1873 and 1879. This
experience led Moody to believe that if
better information could be supplied to
investors, they could be better protected
from the vagaries of the financial markets.
In 1890, Moody obtained a job in one
of Wall Street’s financial houses, Spencer
Trask and Company. He began as an errand
boy, but by 1899 he was the head of research
at the firm. At the time, though Poor’s
Manual of railroads was an established
source of information, a similar source for
information on the growing number of
large, publicly-held industrial companies
did not exist. Moody, with his passion for
transparency and with an eye for business,
decided to publish an equivalent of Poor’s
Manual for industrial companies.
32 FINANCIAL HISTORY | Winter 2015 | www.MoAF.org
Eliphalet Nott Porter, a Spencer Trask
colleague of Moody’s, provided the capital
Moody needed, and Moody set to work
soliciting pre-orders to finance the publication even before writing it. The Manual
was completed in 1900 and sold 5,000
copies. It contained 12 sections with information about the finances and outstanding securities of various industrial firms,
as well as railroads. Moody’s Manual, like
that of Poor, was then updated annually.
It was not long before other firms
entered the market. By 1904, the Poor
Publishing Company added a volume covering industrial companies to its manual
of railroad companies. Poor’s two-volume
manual was more expensive than Moody’s
single volume. However, with nearly the