User 283977

Never Listen to the Rating Agencies

Standard & Poor’s announced Thursday (Dec 18) that it revised its outlook on GE. They stated that… "While GE is still maintaining its “AAA” long-term and “A-1+” short-term counterparty ratings; S&P believes there is at least a one-in-three chance it will cut GE’s credit rating from the top ‘AAA’ tier within the next two years". Of course, that means there is at least a two-in-three chance that they won't downgrade GE's credit rating in the next two years.

TWO YEARS… Does anyone really think these guys can predict anything, never-the-less looking two years in the future under current economic conditions? This raises an obvious question with respect to their motovation.

Rating agencies perform two functions. First, they rate stocks based on current valuation. This provides a basis to justify buy/ sell decisions. Given their valuation of investment grade securities for those mortgage based derivatives, I believe we can safely conclude they can sometimes be unbelievable wrong.

A second part of their functionality, although a part they will never admit, is they are paid to provide a spin designed to move the future market. The latter occurs because there are relationships between the rating agencies and big traders. No way you say?

Lets take a look at that recent S&P 33% possible GE downgrade in the next two years statement. The trading volume for GE increased by over 100% starting at 1PM Wednesday (Dec 17), the day BEFORE the S&P announcement. GE's stock price also plunged in the futures market before the DOW opened on Thursday. This sure looks analogous to the "Blue Horseshoe loves Anacot Steel" effect in the movie Wall Street. Did anyone short large volumes of GE starting at 1PM Wednesday? It seems this is something that the SEC could easily check on… but of course this assumes we have an honest SEC.

If we take the GE example and combine it with the fact that these rating companies provided investment grade security ratings on mortgage based derivatives who's value is impossible to quantify, I believe we have grounds to question the rating companies motivations. I think its time for a full investigation of these ratings agencies, and of the government agency that was supposed to be monitoring them. How can we trust our markets when there are grounds to suspect the presence of collusion between rating agencies and other, as yet unidentified parties designed to swindle investors. It seems possible that Madoff's Ponzi scheme is just the tip of the iceberg.