Ratings Agencies Agree with the Private Market: They Have Failed
In February, I posted a list of country credit ratings. The common theme: comments and emails noted that Greece, Portugal, Ireland, the UK, and US were recipients of grade inflation. So, if the ratings agencies are either doing a shitty job or purposefully protecting certain countries, aren’t they worthless? An S&P spokesperson seems to have said so:
“… Are the ratings agencies always the last to know, or just the last to acknowledge a problem? The agencies point out that they rely on facts presented by issuers, and that they are not responsible for conducting due diligence. An S&P spokesperson tells us, “We are not auditors; we are not accounting firms.” So if all the information about the assets underlying these bonds comes from the person selling them, and the credit rating agency never verifies any of it, investors might ask, what exactly does the rating agency provide? An opinion …”
Recently, Paul Taylor, president of Fitch Ratings, admitted the same failures: “The criticism is certainly justified,” he says. “In certain areas our analysis did not live up to the expectations we had.”
And the private marketplace agrees. “Alan Brown, the chief investment officer at the major fund management company Schroders, says, ‘They have not fulfilled the function they have set themselves. They have not protected investors from defaults. And they have been far too late in keeping up with rapidly changing times.’”
The SEC Needs to Rate Securities
The issue here is the Securities and Exchange Commission has outsourced their oversight responsibilities, and the move has been a complete failure. Thus, the ratings agencies must be shuttered and the SEC needs to start rating securities.
First, the SEC would benefit from getting into the weeds and understanding financial instruments from the ground up. Clearly, this level of enlightenment would have saved the world from chop-shop CDOs and uncollateralized credit default swaps.
Second, the cost to securities originators would be cheaper. The SEC model would be nonprofit, so fees would not include hefty profits which ratings agencies currently rake in. By eliminating the profit motive, the incentive to favorably inflate ratings would nearly disappear.
Investors Deserve the Truth
Underlying all the ratings manipulation is not only hefty kickbacks (in the form of fees and other business relations) but also the assumption that investors are not entitled to accurate ratings. In other words, the truth.
The government admitted to lying during the Great Crash of 2008. (See “The Treasury Department Endorses Lying to the Public“.) And now the ratings agencies are rubber stamping G8 countries with AAA ratings despite some of the greatest deficits and debts in history.
It’s time investors demanded the truth so we can make informed and educated decisions with our life savings. And since the ratings agencies admit they suck, let’s throw them in the trash where they belong.