On Monday, Moody’s downgraded Greece’s government bond ratings to junk status of Ba1 from A3.
As legislators debate new regulation for the financial sector, this action yesterday serves as a reminder to the folks in DC that the current regime of ratings agencies has become an unmitigated disaster.
It also raises a simple question: What possible reason on God’s green earth do the ratings agencies currently serve?
Consider the following facts about Moody’s and S&P:
• They are not unbiased observer of credit issuers.
• They do not provide actionable intelligence for bond or equity investors.
• Their positive credit ratings are, as we learned during the collapse, mostly worthless.
• Downgrades and negative ratings are also mostly worthless — but downgrades do have the redeeming quality of providing comic relief, to wit, the astonishingly belated downgrades of Enron, Lehman Brothers, Bear Stearns, Citi, AIG and now Greece. (Good times!)
• Last, they seem to be incapable of providing any sort early warning about potential systemic credit issues with major economic ramifications.
Other than that, they are a terrific group of folks who have done a bang up job paying themselves huge bonuses for previously unimaginable levels of incompetence.
When the Nationally Recognized Statistical Rating Organization NRSROs were created in the 1975, there seemed to be this genteel belief that no management team would willingly risk their entire firm merely to enrich themselves via short term bonuses. And — Of course! — no firm would ever behave so recklessly as to put the entire economy at risk for profit motives. Indeed, market discipline would insure such was the case.
We now know that this idealistic belief system is completely false, and relying on the efficiencies of the market to enforce regulations is sheer folly.