In addressing these many uncertainties, Immelt has hammered home the message of GE's commitment to its sacred triple-A rating. He took several steps to conserve capital, such as deciding not to increase the dividend next year and suspending the stock buybacks; Moody's (in which Buffett's Berkshire Hathaway is the largest shareholder) and Standard & Poor's immediately reaffirmed their ratings on the company.
But Immelt may be fighting a battle that investors no longer care so much about. The credibility of bond ratings in general tumbled when it was revealed that securitized subprime mortgages had been rated double- or triple-A. GE's rating clearly meant nothing to investors who bid credit default swaps on company bonds up to a price of 700 basis points (the price subsided recently to about 500). Remember, triple-A means creditworthiness on a par with that of the U.S. Treasury, and credit default swaps on Treasury bonds have never traded above 35 basis points. The message of the markets: The rating agencies can say what they like; we'll decide for ourselves.
The US Securities and Exchange Commission released a report critical of the ratings agencies in July 2008. But what the SEC does is less important than what the market has decided: the ratings agencies can not be trusted. Unfortunately, a AAA rating still affects a financial institution's legal ability to hold a security. So while the market has lost trust in the ratings agencies the unrealistic ratings still have real impact.
|Share |||By Randall Parker at 2008 October 10 11:59 PM Economics Financial Regulation|