Rating Agencies' Downgrades: Legit or Controversial?

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 |  Includes: MCO, SPGI
by: Wall St. Cheat Sheet

By Damien Hoffman

With the way the EU is reacting to Moody’s (NYSE:MCO) downgrade of Greece’s credit rating, you’d think they were slapping a PG movie with a XXX warning. Are recent downgrades of sovereign debt and BP (NYSE:BP) merely a job well done by credit rating agencies? Or, are these agencies causing a negative feedback loop that will cause a double-dip recession?

The EU’s Hypocrisy Is Worthy of Dante’s 9th Circle of Hell

Less than two weeks ago in Brussels, EU Commission President Jose Manuel Barroso said that the EU needs a European credit rating agency to compete with the current big three — Moody’s, Fitch, and S&P (MHP). Barroso insisted the EU has been considering such a move since the big three failed to provide adequate warnings during the US banking crisis in 2008.

Let me translate: the EU blames the credit rating agencies for not doing their job during the US banking crisis; however, these same politicians are pissed the agencies are doing their job better during the current sovereign debt crisis. This world class hypocrisy is a perfect example of why Dante needed nine circles of hell in the Inferno.

To make matters worse, European Economic and Monetary Affairs Commissioner, Olli Rehn, is now threatening the rating agencies like a scene from The Godfather. Rehn said:

The Commission is going to look into the question of competition in this sector, where there is a very strong concentration [of players]. We are also going to look into transparency in the methodolgy and the question of conflict of interest.

Basically, the EU wants the rating agencies to do their job when the blame is abroad, yet to see no evil when Greece, Portugal, Spain, etc. have a decreased likelihood of repaying their debts.

Above Ground, Investors Will Simply Find Accurate Sources

Given this highly politicized and compromised game of rating debts, it seems a cottage industry of genuinely independent researchers will offer investors accurate credit ratings. Once these new firms establish a weighty opinion, they will influence markets regardless of political rhetoric or threats.

Bloomberg is already entering the fray with “verdicts on bonds [that] will be driven by computerised number-crunching rather than subjective judgment.” It doesn’t take a hedge fund manager to see more money will be made with more objective evaluations of investment vehicles. And where there’s money to be made …

So, the governing bodies of the EU, UK, and US should take notice: retail investors don’t take billion dollar positions in sovereign debt, pros do. And the pros are not waiting for politicians to tell them what’s behind the veil.

Disclosure: No positions