The rating agencies have become the toxic messengers of the financial markets for the past six years and one of the main reasons for the stock market roller coaster gyrations. Moody's (NYSE:MCO), Fitch and Standard & Poor's, were part of the main factors in the financial meltdown in 2008. There are only two possibilities why they became so incompetent and gave so many total junk bonds AAA ratings.
First possible reason, they were totally unable to evaluate the collateralized mortgage bonds that were worthless and not worth the paper they were printed on and gave AAA ratings anyway. In which case they did not do due diligence and should be closed down by the government.
Second possible reason; they did know the bonds were junk and gave them all triple A ratings anyway. If this is the case then it is a fraudulent, criminal act and the ones responsible should be prosecuted and the companies closed.
Nobody has been prosecuted and no in depth inquiry has been formed to check why these companies, which seem to deem themselves to be more powerful than God at controlling the financial markets. It seem the chaos and mayhem caused in 2008 has been forgiven and forgotten. In fact Moody's, stock price is thriving and they recently raised their dividend 14%. So, it seems the more chaos they create, the better they do.
Are they so powerful they are beyond the law?
On August 19, 2011, William J. Harrington, an analyst, and Senior Vice President at Moody's, blew the whistle with an article titled; "Ratings Agency Rotten To Core With Conflicts, Corruption, And Greed." http://finance.yahoo.com/blogs/daily-ticker/moody-analyst-breaks-silence-says-ratings-agency-rotten-155917921.html
He was in the derivative products group, which was responsible for producing many of the disastrous ratings Moody's issued during the housing bubble. He was employed by Moody's for 11 years, from 1999 until his resignation in 2010. As far as I am aware, Moody's has not responded to the article.
This brings up more questionable dealings in the latest crisis that is facing Europe. Once again, the rating agencies are the main culprits in bringing disorder. They did not create the sovereign debt in Europe; however, they have put Europe under the microscope and exasperated the situation for the past two years. The pace of the downgrades picked up pace in the past six months and the results are plain to see. Anytime that happens, it gives the media the chance to seize the opportunity to magnify the fear and thus generates panic in the financial markets. Now, every media outlet in the world is all over the European debt story and it has created a real crisis of confidence that is reeling out of control.
Portugal and Greece have always been the weak links in Europe and to a lesser extent, so have Italy, Ireland and Spain. At any time over the past 20 years, Greece could have been singled out to have its debt downgraded, so why now and why has Moody's acted with such ferocity and intense vigor to continually attack the poor relations of the EU?
While Moody's kept downgrading the EU countries' debt three questions need to be asked...
- Who is paying the rating agencies for downgrading Europe's sovereign debt?
- Who is profiting from the downgrades?
- Why is the US government not taking action to stop them from downgrading EU debt and yet reacted immediately to the S&P downgrade of US debt? Why the double standard?
Perhaps the SEC and other government bodies need to act now and look into a possible ban the rating agencies from doing any more damage on sovereign debt?
Or, conceivably the rating agencies have the blessing of the treasury and other government departments to continue to put the spotlight on Europe, so the USA debt can keep a lower profile and investors can run into treasuries as a safe haven?
The first crack in the wall came when S&P dared to downgrade US debt, but all that has done is make people run for more shelter in USA treasuries that are already overvalued and in the center of a major bubble. This is a prime example of how fear can enlarge over-valuations that continue to go higher despite going against every investment rule in the book.
After the US downgrade the government said it would investigate S&P. The result so far has been the resignation of the head of S&P. Which begs the question, why are the powers that be in the US government not investigating Moody's continual attacks on Europe debt?
So what is an investor to do in the face of more country downgrades that rock the markets?
The average confused investor will be best suited to look at Multinational companies with strong balance sheets low valuations and pay a decent dividend for safer havens than US Treasuries. Four of the best Hi-tech stocks that fit he bill are; Intel (NASDAQ:INTC), Microsoft (NASDAQ:MSFT), Cisco (NASDAQ:CSCO), Oracle (NYSE:ORCL).