Why Are The Ratings Agencies Still in Business?

[Midpack]

The Moody's thread made we ask myself again what credibility they have, especially after the 2008 meltdown...

Why are the ratings agencies still in business? - CBS News

The big three credit ratings agencies - Standard and Poor's, Moody's and Fitch - have been having a tough time of late. And by "of late" I mean since the turn of the century. The agencies have one primary job to do: Letting investors know how likely it is that a security (or similar) is going to pay off as promised. Unfortunately, they are becoming uncannily good at getting this exactly wrong. The most recent example: Greece.

The credit ratings agencies are hopelessly behind the curve. Last week they cut Spain's ratings and the markets shrugged it off because investors have known for some time that the economy there is a train wreck. Add all this to the fact that the agencies didn't just miss the boat on mortgage securities they missed the whole ocean and you have to wonder: Why are they still in business?

 

[pb4uski]

There record at flagging credit problems is poor, but it seems to me that there isn't currently a better alternative other than analyzing credit yourself.

When I was thinking of investing in individual bonds a couple months ago I noticed that the yields for financial issuers were substantially better than the yields of other corporate issuers for similarly rated debt, so it seems that the bond market had already priced in the downgrades we saw last week.

It is hard to know if this was a result of the bond market's own credit analysis of individual issuers or simply anticipation of downgrades based on Moody's earlier announcement that they were reviewing these.

In any event, I agree that their credibility is suspect, but what better alternative is there?

 

[houstenh]

Weiss ratings.

 

[pb4uski]

Weiss ratings.

Where is the "puking" emoticon when you most need it?

 

[Animorph]

1) They are built-in to the system. Many institutions are restricted to buying certain ratings only.

2) Until something better comes along, everyone seems to be going along with the ratings fiction.

3) You don't have to trust them, just use them. The ratings do mean something, just not what they say.

 

[Tadpole]

1) They are built-in to the system. Many institutions are restricted to buying certain ratings only.

2) Until something better comes along, everyone seems to be going along with the ratings fiction.

3) You don't have to trust them, just use them. The ratings do mean something, just not what they say.

Sounds like a Mofia protection racket to me.

 

[H2ODude]

I really resent the ratings agencies and the role they played in the bundled mortgage mess. I used to have to go to NY representing our city for bond ratings and it was like groveling before the King; we spent years doing what they prescribed to upgrade to AAA and they'd move the bar just a leeeetle bit higher every time. I was tempted post 2008 to make a veiled (or maybe not so veiled) dig at them when they kept badgering our very sound utility finances. Moody's was the worst of them. I suppose that would mean there AAA was the most important, but it always struck me as a tremendous racket. And if we didn't like how Fitch or S&P was treating us, we wouldn't use them on an issue. So how is that protective of the bond buying community? Your basically picking your rating agency to get the best ratings, and PAYING them for the privilege.

 

[traineeinvestor]

There record at flagging credit problems is poor, but it seems to me that there isn't currently a better alternative other than analyzing credit yourself.

When I was thinking of investing in individual bonds a couple months ago I noticed that the yields for financial issuers were substantially better than the yields of other corporate issuers for similarly rated debt, so it seems that the bond market had already priced in the downgrades we saw last week.

It is hard to know if this was a result of the bond market's own credit analysis of individual issuers or simply anticipation of downgrades based on Moody's earlier announcement that they were reviewing these.

In any event, I agree that their credibility is suspect, but what better alternative is there?

+ 1

If everyone had to do their own risk assesment, not only would you expect the cost of credit to go up but the cost of investments which utilise bonds - such as managed funds and annuities.

The other use of rating agencies is that it gives portfolio managers a "prudent man" defence if/when they make a bad investment.

 

[Semiretired2008]

Slightly off topic, but still fits in an indirect way.

With markets continuing to move in lockstep to every headline out of Europe, China or the Fed, the days of individual stock analysts may finally be numbered.

"There is an old saying about analysts among the gray hairs of Wall Street: 'In a bull market, you don't need them, in a bear market, they'll kill you,'" said Nick Colas, chief market strategist at ConvergEx Group. "And in a flat market, it seems, both apply."

Why Analysts May Stop Covering Individual Stocks - Yahoo! Finance

 

[clifp]

Here is a good article that explains some of the detail of the Stockton bankruptcy.

In thinking about this thread these paragraphs were an eye opener.

Daniel Berger, a senior market analyst at Municipal Market Data, a unit of Thomson Reuters, said last week, before the bankruptcy filing, that the municipal bond market had viewed Stockton's fiscal problems as "a slow-moving train wreck." The possible bankruptcy filing, he said at the time, was seen as an "isolated occurrence."
As the 2000s advanced, Stockton continued to spend freely with the support of voters, politicians from both parties, employees and bondholders. Rating agencies were quiet about any risks and only started to downgrade the city's creditworthiness two years ago.

Seriously only in 2010 did they start thinking that situation was getting bad!!?. Now I can forgive them not starting to take the problem seriously in 2007 or even 2008. But by 2009 obviously pension fund were severely underfunded across the country and Stockton's looked even worse than most.

Do the rating agencies actually do any real investigation or do they just plug numbers into a spreadsheet?

 

[Semiretired2008]

Do the rating agencies actually do any real investigation or do they just plug numbers into a spreadsheet?

Most of it is just plugging numbers into the companies spreadsheet / evaluation program. That way they can always blame it on the numbers.