The big three credit rating agencies are said to...
The decisions of the "Big Three" catalyze market moves in often unpredictable ways, creating a strong ripple effect.
Yet these credit rating agencies have investors all over the world looking to them for years (and decades) for credit rating information...
Investors across the world look to credit rating agencies to judge where to place their bets in the market. For governments, the ratings agencies have a lot of power over the popularity of bonds: cash given to governments by investors that, over time, will pay a return on the original investment -- unless the government defaults. The downgrade of Ireland this week signaled Moody's belief that Ireland has a higher likelihood to default on investments. And global investors have little appetite to invest in those bonds.
Given that doing something, even taking advice can become a habit to the point where you may trust a source just on habit (which is almost an old wives tale by now, i.e. 'it takes 21 days to form a habit':
What this study reveals is that when we want to develop a relatively simple habit like eating a piece of fruit each day or taking a 10 minute walk, it could take us over two months of daily repetitions before the behaviour becomes a habit. And, while this research suggests that skipping single days isn't detrimental in the long-term, it's those early repetitions that give us the greatest boost in automaticity.
So predictably (not unpredictable at all) the markets took a hit:
"The futures were the first U.S. gauge of investor sentiment following Friday night's downgrade, removing the United States' AAA status for the first time. They give an indication of how investors will react when regular-hours U.S. trading begins at 9:30 a.m. ET Monday."
Credit rating agencies don't seem trustworthy to me.
More...
1.
At 2 mins - "These are the guys who gave AAA ratings to mortgages that were toxic" (about Standard and Poor)
2.
Notes: The big 3 - S&P, Moody's and Finch - are the main cause of the 2008 financial meltdown. - 2. They get paid by private companies for private ratings! clear contradiction of interest, especially when a private company is exerting influence on any economy (much less a global economy).
3.
Notes: Investigation into why credit agencies rated mortgage securities as AAA when they obviously weren't. 2. Fintch avoided downgrading US but went after New Jersey!.
Credit rating agencies have become a threat to stability:
Proof 1:
But beyond the rights and wrongs of this row lie deeper questions of how much trust should be placed in credit rating agencies and whether the influence they have over sovereign debt markets needs to be curbed. Politicians are right to fear the agencies' red pens. A downgrade sends up the cost of borrowing and can plunge nations deeper into a spiral of indebtedness. The Greek debt crisis laid bare the immense, and some would say unwarranted, power that they wield. Unsurprisingly, the big three – S&P, Moody's and Fitch – have come under fire, with Germany and France calling for their wings to be clipped.
Credit agencies operate in the obscure backwaters of the financial system, but played a major role in the meltdown.
Proof 2
Moody's, Standard & Poor's and Fitch, the world's biggest agencies, have been criticised by the EU and by high-deficit countries for exacerbating the crisis, as a downgrade fuels investors' fears about the ability of any debtor to repay its loans. The discussion started when Greece was downgraded at the height of the market turbulence this year that ultimately pushed the country into a bailout programme.
Ireland's cut, which puts it on the same level as Russia and Lithuania, pushes up its borrowing costs – a burden that a country already in the midst of draconian budget cuts can ill-afford.
Proof 3
The ratings agencies received widespread criticism for their role in the financial crisis after giving AAA ratings to investments made up of sub-prime home loans that subsequently imploded. S&P attracted more heat in August when it downgraded the US's debt. A move that US treasury secretary Tim Geithner said showed "terrible judgement".
The SEC is weighing action over a particular CDO known as Delphinus CDO 2007-1, which was singled out as a "striking example" of what went wrong in the credit crisis by the Senate committee report Wall Street and the Financial Crisis, published in April.
The $1.6bn (£1bn) CDO was downgraded a few months after AAA ratings were issued by both S&P and rival Moody's. The ratings agencies awarded tranches of the investment their top grade in July and August of 2007 but had begun downgrading them by the end of the year, "and by the end of 2008, had fully downgraded its AAA-rated securities to junk status," according to the report.
German government had to actually seek assurances that the credit agencies wouldn't interfere with the tough economic problem the Europeans have:
"German government sources said they had received assurances from the international ratings agencies that they would not rush to judgment in declaring a Greek default but would take their time in studying whatever finally emerged and for it to impact on Greece's private creditors." .
And eventually getting the rating agencies away from meddling in economies has been written into a new plan...
"14 Reduce reliance on non-European credit rating agencies"
An EX- Fed guy talks about credit rating agencies:
About credit ranking agencies, "I think they've injected themselves into a situation that is beyond their comprehension" (1 min 40 secs approx).
Also, "Its not like their record has been so distinguished that they deserve precedence in this area" approx 2mins
An ex-credit agency guy says:
Harrington, who worked at Moody's for 11 years until he resigned last year, said ratings agencies suffer from a conflict of interest because they are paid by the banks and companies they are supposed to rate objectively.
Even though they get paid for ratings credit rating agencies believe they are qualified to rate countries:
Critics argue that the rating agencies were compromised in the decision making on the banks after it was discovered by shocked policymakers that financial product providers paid the agencies to assess their wares.
The agencies owned up to their mistakes in the wake of the crisis. They agreed assessments made of derivatives at the heart of the crisis were flawed.
But they have maintained that their assessments of government economic policies and the effects on government debt remain relevant and robust.
[ Note: 5th October 2011 - 1. Problems with private agencies creating national and global economic problems "Those verdicts provoked rage from the EU. Viviane Reding, the EU justice commissioner, said: "Europe can't allow three private US enterprises to destroy the euro." Either their "cartel" was smashed or "independent" European and Asian ratings agencies would be set up. "We can't have a situation where a cartel of three US enterprises decides the fates of entire national economies and their citizens," she said." and, 2. Constant interference has worsened the economic downturn and has made some people fed up with the euro; credit agencies have been part of the problem but thier statements suggest they are saying they are trying to help; "The Italian government's credit rating has been slashed by Moody's from Aa2 to A2 with a negative outlook.The ratings agency blamed a "material increase in long-term funding risks for the euro area", due to lost confidence in eurozone government debts. Despite Rome's low current borrowing needs, and low private-sector debt levels in Italy, Moody's said market sentiment had turned against the euro." ]
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