Are Credit Rating Agencies Good for Anything?

NOW they tell us!

S&P analyst Tanya Azarchs said that, in addition to the economic woes, the banking sector’s “lax underwriting standards due to excess competition mean this cycle will be worse than prior cycles.”

Are you kidding me? Where was S&P four years ago when the lax underwriting standards became standard industry practice?

I won’t rehash all the reasons for the lax lending standards. And I’m not about to take a bullish contrary opinion position in bank stocks simply because of this. My sole point is, the geniuses at Standard & Poors seem to be just now figuring out that the prior lax lending standards are going to be making recovery more difficult, so the banks need to be downgraded. Oh really? Does S&P really think that bank debt is more dangerous now, 24 hours after the Treasury Secretary stated publicly that no more large banks are going to fail? Does S&P really think that, after the nightmare that Lehman created in the money markets, Paulson or his successor Tim Geithner are going to allow a bank debt default? If anything, bank debt has actually become SAFER because it has the implicit backing of the U.S. government.

If S&P had any guts, they’d cut U.S. debt. Instead, they take the moronic position that bank debt is now more risky. Again, I am not making an economic statement, or a bullish stock argument. I am simply stating that S&P’s downgrading of bank debt as more risky is wrong-headed when the Treasury is following the world’s lead of guaranteeing bank debt.

This has to be the most worthless piece of drivel I’ve ever read.

Comments

[Tom Armistead:]

If you think the latest from S&P is the most worthless drivel you've ever read, then you haven't been following the rating agencies too closely.

Try reading Moody's Nov 2008 "The Changing Business of Financial Guaranty Insurance." This document covers its subject matter accurately enough, with one glaring omission:

Moody's is absolutely unwilling to acknowledge in any way, shape, form or manner its central role in creating the credit crisis which has destroyed the whole industry, to the point that only the US Government has any credibility and that comes from the power of the printing press.

Moody's has absolutely no insight into the cause of the problem, which was their greed and folly in bestowing triple A ratings on toxic waste.

2008 Dec 21 03:29 PM

[Dan Walker:]

Never try to teach a pig to sing. It is a waste of time and it annoys the pig.

2008 Dec 22 01:53 AM

[BerkeleyBob:]

I think it is remarkable that the rating agencies have not been the subject of more adverse comment and down the line, possible criminal liability for aiding and abetting the massive fraud in the sale of toxic loans. It is clear that the rating agencies drastically mis-understood the nature of sub-prime and Alt-A loans. Institutional investors and fiduciaries including foreign central banks relied on the rating agencies' representations. As an individual investor, I can put no credence on anything the rating agencies (or other "experts") say and have to make do with my own due dilligence.

2008 Dec 22 12:50 PM

[Paul Price:]

The best way to get our credit markets functioning right would be to totally eliminate all bond insurance.

If artificial props for guaranteeing repayment were removed then underwriters and bond buyers would need to do actual due dilligence.

Ironically, many of the guaranteeing firms turned out not to be credit worthy [e.g. AIG] and the insurance itself could never be honored.

Instead of pumping out more and more complex 'engineered' financial products, we'd be better off to just go back to the "I'll lend if you can verifyably repay" ways of the 1950's - 1970's.

2008 Dec 28 07:45 AM

[Don Fishback:]

Tom, If you think I haven't been paying attention, then you haven't been reading my blog. I have an entire category devoted to the ratings agencies. To me, the ratings agencies were the grease that allowed the machine to function. None of this mess would have been able to proceed as far as it did without those AAA ratings.


On Dec 21 03:29 PM Tom Armistead wrote:

> If you think the latest from S&P is the most worthless drivel
> you've ever read, then you haven't been following the rating agencies
> too closely.
>
> Try reading Moody's Nov 2008 "The Changing Business of Financial
> Guaranty Insurance." This document covers its subject matter accurately
> enough, with one glaring omission:
>
> Moody's is absolutely unwilling to acknowledge in any way, shape,
> form or manner its central role in creating the credit crisis which
> has destroyed the whole industry, to the point that only the US
> Government has any credibility and that comes from the power of the
> printing press.
>
> Moody's has absolutely no insight into the cause of the problem,
> which was their greed and folly in bestowing triple A ratings on
> toxic waste.

2008 Dec 31 11:04 AM