Also from Der Spiegel, a useful backgrounder on ratings agencies and their role in the financial crisis especially relevant following Standard and Poor’s downgrading of British sovereign debt.
These issues are at the center of bitter disputes in the financial industry. The major agencies' ratings determine the success or failure of bonds, structured financial products and entire companies. Even the creditworthiness of countries can suffer if the agencies' analysts form poor opinions of their finances. That happened to Spain in January, when its government bonds were downgraded, promptly causing a rise in Spanish interest rates.
Each of the agencies' plus or minus signs automatically triggers the flow of billions. When Standard & Poor's, Moody's or Fitch downgrade a company's securities, it routinely triggers a panic, forcing the affected company to obtain new capital as quickly as possible, while large funds caught in this predicament automatically sell their holdings. This was the way of the past, and, despite all criticism, it continues to be standard practice today.
The criticism has prompted investors to hold Moody's and the other two major rating agencies responsible for their losses. Regulatory agencies and governments in Europe and the United States plan to impose sharp restrictions on the major agencies, which, in turn, are fighting desperately to preserve their reputation.
That reputation has suffered greatly, especially after the US Securities Exchange Commission (SEC) published a report on an investigation that contained damaging e-mails written by agency analysts. In the report, one analyst writes: "Even if cows were putting this deal together, we would still issue a rating." Another writes: "Let's hope we're all rich and retired when this house of cards collapses."
Each of the agencies' plus or minus signs automatically triggers the flow of billions. When Standard & Poor's, Moody's or Fitch downgrade a company's securities, it routinely triggers a panic, forcing the affected company to obtain new capital as quickly as possible, while large funds caught in this predicament automatically sell their holdings. This was the way of the past, and, despite all criticism, it continues to be standard practice today.
The criticism has prompted investors to hold Moody's and the other two major rating agencies responsible for their losses. Regulatory agencies and governments in Europe and the United States plan to impose sharp restrictions on the major agencies, which, in turn, are fighting desperately to preserve their reputation.
That reputation has suffered greatly, especially after the US Securities Exchange Commission (SEC) published a report on an investigation that contained damaging e-mails written by agency analysts. In the report, one analyst writes: "Even if cows were putting this deal together, we would still issue a rating." Another writes: "Let's hope we're all rich and retired when this house of cards collapses."
You don’t have to be a fan of Brown’s handling of the economy to wonder whether if governments stopped their misguided attempts to interfere in the free market for ratings agencies then their ratings would, because of entirely objective criteria, begin to improve.
Or in the words of an anonymous information retrieval asset handler to the victim of enhanced interrogation techniques in Terry Gilliam's Brazil:
"Confess now before you permanently damage your credit rating."
Posted by: Fellow Traveller | May 23, 2009 at 09:58 PM