For credit rating agencies, who typically move at a snail's
pace, it's been an unusually busy week.
Moody's Investors Services (
) announced that it might downgrade the U.S. government's credit
rating and it gave Greece a 50 percent chance of defaulting on its
debt. Moody's also said large U.S. banks could be at risk for
credit downgrades because financial help from the government was no
longer a safe assumption. What a week!
Still, none of these major announcements solidified the investing
public's opinion that credit ratings are any more accurate or
Some Progress but Not Much
Recognizing these monster shortcomings, the Securities and Exchange
Commission (SEC) recently proposed new rules for credit raters, who
have done an excellent job of skirting most securities rules
governing their behavior.
'In passing the Dodd-Frank Act, Congress noted that credit
ratings applied to structured financial products proved inaccurate
and contributed significantly to the mismanagement of risks by
financial institutions and investors,' said SEC Chairman Mary L.
Schapiro. 'Our proposed rules are intended to strengthen the
integrity and improve the transparency of credit ratings.' No one
knows if the SEC's proposals will be effective remedies, but a Hail
Mary try certainly can't hurt.
are still timidly assigned for the purpose of not offending the
institution being graded versus giving investors meaningful insight
as to the true financial condition of the entity. This assumes,
probably incorrectly, that credit raters even know the true
financial condition of whomever or whatever they're rating.
In May, the three major U.S. credit rating agencies won the
dismissal of lawsuits that aimed to hold them liable for acting as
'underwriters' by helping banks to dress up otherwise worthless
debt securities with pristine ratings. Likewise, credit raters have
been rightfully blamed for contributing to the 2008-09 financial
crisis by issuing inaccurate ratings on high risk securities. The
agencies' counter argument is that their credit opinions are
protected by the First Amendment.
The 2nd Circuit Court agreed with credit agencies saying they
did not help distribute the securities but merely aided others to
do so with their ratings. 'Merely commenting on draft offering
documents does not constitute the requisite participation in
underwriting,' stated Circuit Judge Reena Raggi, writing for a
Put another way, rosy credit opinions are not against the law
and neither is collaborating with securities firms to help them
sell questionable debt.
Credit Ratings Waning Influence on the Market
The stock market (NYSEArca: VTI) seems to have long ago dismissed
the self-importance and high esteem that credit raters still place
Moody's announcement that major banks could face a downgrade
filled headlines but didn't do much else.
(NYSEArca: KBE) and the financial sector (NYSEArca: XLF) were
already declining as they have been for most of this year.
The same thing can be said about the U.S. Treasury market
(NYSEArca: TLT), which has rallied despite the threat of a credit
Either the market doesn't give a rat's behind about the credit
opinions coming from rating agencies or it already knows they're
badly wrong - or maybe both.
Other Uncomfortable Questions
What if the U.S. government was an individual or corporation? Would
it still be allowed to keep its triple A-rated status despite its
decrepit financial condition? How bad is thedeficit? What kind of
conclusion can be drawn from evaluating the government as if it
were a corporation?
Profit Strategy newsletter
examined the U.S. government's finances in its May 2011 issue,
analyzing the government as if it were a corporation - the USA,
Inc. By viewing the government's finances this way, it provides a
more realistic view of the trueness of its financial condition
versus relying on credit ratings.