Nobody From Nowhere (@i8dc)

Occasional Common Sense

Why Does Anybody Pay Attention to the Rating Agencies?

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Recall, if you will, the run-up of the housing bubble.  Lenders threw money at anybody with a pulse, generating loans at an unprecedented rate, inflating housing prices beyond all reason.  The lenders then bundled the loans into debt securities which the rating agencies – primarily Moody’s and Standard and Poor’s – dutifully stamped AAA, apparently without really looking into the creditworthiness of the borrowers.

How is it that anybody pays attention to them anymore?

Their business was built on trust.  They were supposed to be the unbiased experts, neutral risk assessors who provided a rating based on deep, fundamental research.  Turned out they provided ratings based on who was paying for their services.  It was the banks, the ones selling the bundled loans, who paid for the ratings.  Think about the incentive; if one agency won’t give you a top rating, well then you just might take your business elsewhere.  Or think this way – when you buy a house, who pays for the inspection?  The buyer – the one taking the risk.  The one seeking protection.  The rating agencies should have been working for the buyers of the bundled loans, but they weren’t.  They were working for the sellers.

And so they plastered everything with AAA ratings.  And we all suffer because of it.

So why would anybody care today if S&P says that it might downgrade U.S. debt?  Why do they have any remaining credibility?  Have they earned it back?  No.  Why is this company even still in business, after contributing so much to the massive recession from which we’re still struggling to recover?

Second part of the question.  Exactly what insight does S&P or Moody’s provide into this situation?  Are the markets really unaware of anything involved with what’s happening here?  The CBO and OMB churn the numbers constantly, scores if not hundreds of outside agencies scrutinize every statistic there is, and dozens of economists and pundits provide analysis on the government’s finances daily.  What, exactly, do the rating agencies provide here?

One of my fondest wishes these days would be for the rating agencies to all downgrade U.S. debt, and for the market’s reaction to be — nothing. For interest rates to remain flat.  It would show that the market doesn’t much care what S&P and Moody’s says, that they add no value to this discussion.

Which would be much better than during the housing bubble, when their value added was distinctly and significantly negative.

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Written by David Clayton

July 20, 2011 at 3:50 pm

Posted in Punditry

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