2008 October 10 Friday
Markets Lose Faith In Credit Ratings Agencies

An article about General Electric illustrates the lack of credibility of the major debt ratings agencies.

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.

Fitch, Standard & Poors, and Moody's are getting slammed and getting called useless.

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


Comments
kurt9 said at October 11, 2008 9:27 AM:

This is the real reason for the current chaos. Since people no longer trust the ratings agencies, their is no current method for evaluating the risk inherent to the mortgage bonds. Thus the banks are much less willing to lend to each other and the LIBOR rate is through the roof.

JSBolton said at October 12, 2008 3:58 AM:

It's the Obama panic, more than these other factors for the current global market problems. Markets look ahead, and they're seeing Obama disaster. 74% of CEO's said Obama would be disastrous. When Obama is in the lead, markets go way down. If the ACORN RICO lawsuit puts him behind, we might see a recovery of confidence.


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