Posted on March 30 2010.
Tags: aaa credit, accounting firms, credit rating agency, Debt, due diligence, fitch ratings, fund management company, grade inflation, greece, issuers, mco, mhp, Moody's, oversight responsibilities, paul taylor, portugal, private market, private marketplace, S&P, scams, schroders, securities and exchange commission, shitty job, spokesperson, UK, US
Yesterday, S&P (MHP) reiterated the UK’s AAA credit rating while adding a rhetorical threat to downgrade in the future. Really? The UK is AAA? That rating alone shows just how little the ratings agencies — including Moody’s (MCO) and Fitch — have changed since they abetted the CDO scams.
Ratings Agencies Agree with the Private Market: They have failedIn 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 SecuritiesThe 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 TruthUnderlying all the ratings manipulation is not only hefty kick backs (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.
What do you think about the ratings agencies? Let us know in the comments below …
Readers who liked this also enjoyed these posts:Portugal Credit Downgrade Gives Us P-G in Global Game of PIIGSChart Junkie: Credit Card Debt in the United StatesExclusive: Jim Rogers is Long the Euro Be Heard: Leave Your Comments on this Topic:Click here to cancel reply.
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Yes, this is the first big step into the future of media consumption. No, it doesn'tTags: aaa credit, accounting firms, credit rating agency, Debt, due diligence, fitch ratings, fund management company, grade inflation, greece, issuers, mco, mhp, Moody's, oversight responsibilities, paul taylor, portugal, private market, private marketplace, S&P, scams, schroders, securities and exchange commission, shitty job, spokesperson, UK, US
Yesterday, S&P (MHP) reiterated the UK’s AAA credit rating while adding a rhetorical threat to downgrade in the future. Really? The UK is AAA? That rating alone shows just how little the ratings agencies — including Moody’s (MCO) and Fitch — have changed since they abetted the CDO scams.
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 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.
Underlying all the ratings manipulation is not only hefty kick backs (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.
What do you think about the ratings agencies? Let us know in the comments below …
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Damien Hoffman - who has written 517 posts on Wall St. Cheat Sheet.
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