There’s scant doubt who the greatest villains are in the ongoing economic and financial market collapse: the rating agencies.
Their behavior has been disgraceful. In theory, remember, rating agencies are supposed to be rational, dispassionate judges of the creditworthiness of debt securities and the companies that issue them. They’re the ones who are supposed to be smart and sober enough keep their heads during times (like this) when everyone else in the market is running around screaming.
But in practice, the agencies have turned out to be the loudest screamers of all. They’ve become immune to logic and evidence; instead, what passes for rating agency analysis lately seems to begin and end with a single-minded focus on an issuer’s stock price. If it’s going down, look out for a downgrade. Any actual fundamental inputs related to the company, such as its balance sheet strength, say, or its ability to generate earnings and cash flow, don’t seem to count.
As I say, a disgrace. All this would be pathetic if it hadn’t been so damaging to the financial system.
And of the three major agencies, one in particular is worst of all: Moody’s (NYSE:MCO). The latest piece of evidence how feckless Moody’s has become arrived last week, with word of its downgrade of bond insurer Assured Guaranty (NYSE:AGO), to AA2 from AA.
The move was vintage Moody’s. The agency cited “large single and sectoral risk concentrations” and a reduction in new business opportunities. Never mind that Assured’s “sectoral risk concentrations” never seemed to bother Moody’s before, or that, in insurance, “new business opportunities” have nothing to do with an insurer’s ability to meet its existing obligations. In the rating agencies’ new upside-down logic, all that’s irrelevant. And never mind, too, that Assured has recently acquired FSA’s financial guarantee business at what all sides agree are very attractive terms. The people at Moody’s are scared out of their socks, and had made up their minds.
Oh, and in a nice wrinkle, the agency left Assured hanging for fully four months after it first put the company on credit watch. Typically, such reviews only take two to four weeks.
Given the abuse Assured has taken at the hands of Moody’s, I was very happy to see that the company’s CEO, Dominic Frederico, blasted back in a press release on Friday. He makes the company’s case far better than I can. Here are some highlights from what Frederico had to say, along with my comments.
We are disheartened by Moody’s downgrade of the debt and insurer financial strength ratings of Assured and its subsidiaries, despite our best efforts to address each and every concern raised by Moody’s during the review process. [Emphasis added.]
TKB: The company jumped through hoops to address, in detail, all the agency’s specific concerns—and was simply ignored. This is precisely what’s so infuriating about how Moody’s goes about its business these days: the agency makes up its mind, then simply disregards any information put in front of it that contradicts the conclusion it’s hell-bent on arriving at.
In a market environment that requires more measured and consistent approaches from regulators, legislation and the rating agencies, Moody’s behavior has been counterproductive.
TKB: “Counterproductive”—as in, “worse than useless.” Amen to that! No other organization or group has done more damage to the financial system than Moody’s. The agency makes ratings decisions that are irrational and arbitrary, yet those decisions can have severe real-world ramifications. Loan covenants become violated. Collateral requirements go up. Borrowing costs soar. The effect of it all is to add stress to an already stressed system. And why? Because the people at Moody’s are spooked by falling stock prices. Someone--the SEC, Congress, a major shareholder such as Warren Buffett, someone--needs to stop Moody’s from continuing its reign of terror.
Their repeated and prolonged credit review process has exacerbated investors’ fear and harmed overall market creditability which ultimately has created more uncertainty about the value of our product than was necessary.
TKB: Amen to that, too! Moody’s handling of the ratings of the financial guarantors over the last year has been a scandal. Take, for example, the four months Moody’s took to “review” Assured Guaranty before deciding to downgrade it. It’s especially scandalous since Moody’s so clearly ignored the mountain of data Assured provided it.
We have to conclude that Moody’s downgrade of our ratings is due to their decision to place an inordinate emphasis on their outlook for near-term industry factors – which are highly subjective and in no way certain – and it de-emphasize their long standing evaluations of portfolio credit quality and capitalization.
TKB: Translation: the panic attacks going on at Moody’s lately are even more severe than the ones afflicting those reporters you see hyperventilating on CNBC. The agency has simply disregarded an objective, rational evaluation of Assured’s portfolio quality and claims-paying ability.
Kudos to Dominic Frederico. The ratings agencies need to be stopped before they inflict even more damage on the financial system. For starters, the SEC should revoke their special status as Nationally Recognized Statistical Ratings Organizations (NRSROs), or ask Congress to eliminate the designation altogether. And Moody’s should be the first to go!