The big 3 credit ratings firms seem to have missed nearly every major crisis, collapse, bankruptcy and default of the past few decades.

The fear is that they will – belatedly, and without providing any meaningful insight (beyond CYA) further pummel Greek government bonds by lowering their ratings for Greece.

The fear that Standard & Poor’s and/or Moody’s will soon lower the boom (Fitch already has) has Gold rallying, and the US dollar up 0.135 (0.17%).

MarketBeat reports that spreads on Greek borrowing has widened vs Germany to 3.55%, and the cost of insuring a Greek government bond against default for five years, has hit about $397,000 annually (up from $382,000 yesterday).

Equities down 2% at one point, have climbed back to down 1% or less.

It just goes to show you that Ratings Agencies are no different than analysts: You don’t need them in a Bull market, and you don’t want them in a Bear market . . .

~~~

And the markets? They are none too happy about all this:

Category: Credit

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

15 Responses to “Credit Rating Firms: Worthless in a Bull Market, Damaging in a Bear Market”

  1. Pat G. says:

    I am sorry but if you are permitting agencies who are conflicted to determine your investmest strategy, you can get better odds in Vegas on y0ur money…

  2. dead hobo says:

    I beg to differ.

    If you’ve been walking around with ankle deep dog crap on your shoe all day and finally notice it right before you come home and walk on the carpet, are you better of leaving your shoes on as you walk into the living room just because you’ve ignored the dirt all day? Or should you finally do the right think, even though it is a little late in the day? The question of why you walked around like that all day just conflates the issue.

  3. The Curmudgeon says:

    Credit rating agencies should ever and always be ignored. They are paid by the ones that they rate.

    But the downward spiral you describe as a result of the ratings agency downgrades: Nobody buys Greek bonds so the price goes down so the ratings agencies downgrade them so nobody buys them so the price goes down…is the exact opposite of the–I hesitate to use the term–”virtuous” cycle that pushed their prices up higher than they should have been in the first place.

    Of course, this process bears a striking resemblance to the subprime mortgage market in 2007, but surely we’d have learnt from our mistakes by now.

  4. patfla says:

    It’s my understanding that the current state of S&P, Fitch and Moody’s is seen as a market opportunity by other such as DBRS. Dominion Bond Rating Service or Canada.

  5. patfla says:

    OF Canada

  6. David Merkel says:

    Barry, when I was a bond manager, we had a rule for our analysts — ignore the rating, but read the write-up. The analysts at the rating agencies would give their true opinion in the write-up. The buy side analysts usually found themselves in agreement with what was written, and would tell us what they thought the rating really should be.

    After that, the portfolio managers were encouraged to ignore the rating, except to calculate the yield haircut for the incremental capital employed. Those doing structured products developed their own models for benchmarking the risks of deals, ignoring the ratings, but reading the reports, because there was often really good information on the weak points of deals, including things not mentioned in the prospectus.

    As managers, we knew we could always find seemingly cheap bonds for a given rating, but they were “cheap for a reason.” We would avoid them. Who would buy them? Collateralized Debt Obligations [CDOs]. In CDOs were run by mechanical rules that relied on the ratings of the debts, among other things.

    As such, they tended to fail. After seeing the debacle 1999-2002 in CDOs, most insurers swore off CDOs — aside from AIG. They were structurally weak securities with lousy collateral.

    -==-=–=-==-=–=-=

    The rating agencies have a hard task. In the old days, they said that ratings were good for a full credit cycle. Bond managers wanted stable ratings, and didn’t want to be bothered with ratings that were higher in the boom, and lower in the bust.

    In 2001, after Enron, the rating agencies took several actions to be more proactive about ratings. Result: a lot of ratings moved down rapidly, lead to a collective screech from bond managers. Result 2: the rating agencies stopped being proactive.

    You are mostly right that in a bull market, they are worthless, and in a bear market, you don’t need them. But they do have uses:

    1) Many bonds have no one analyzing them — particularly small deals. A rating helps create a buyer base.

    2) The bread-and-butter corporate ratings are usually pretty accurate.

    3) They summarize a lot of useful data in a small space.

    4) What the analysts write is usually pretty good. They are reasonably good at ranking credits against one another.

    The corruption occurs higher up in the firms, because they mis-set the ratings for categories as a whole. CDOs too high, subprime CDOs way too high, Munis too low, CPDOs ridiculous etc. Part of the problem is inadequate thinking and risk aversion about new asset classes, because they don’t have loss data for assets that have been bought to securitize.

    I’ve written too much, but I will give you one more key lesson of the period 1990-2008 regarding ratings, and this applies to sovereign issues today: Ratings that must be maintained in order to avoid a given result are dangerous, and good bond managers avoid investing in such bonds.

    Examples:

    1) Insurers that made their Guaranteed Investment Contracts [GICs] putable on ratings downgrades. (Fixed rate failure early 90s, floating rate late 90s.

    2) Enron-like structures that would force issuance of preferred stock on a downgrade (and some other triggers)

    3) Reinsurance treaties callable on a downgrade.

    4) Swap counterparty agreements requiring more capital on a downgrade.

    5) Step-up bonds, where more interest is paid after a downgrade — not worth it…

    It is perverse to want more out of a company when they are downgraded — often it leads to a collapse. As a bondholder, it does not pay to stand near cliffs where a downgrade can change the creditworthiness of a company.

    Sovereign governments are the same way. You can’t make them pay; the only big penalty is getting shut out of the bond market — which means that in the future, their budget would have to be balanced on a cash basis. So, I offer one simple insight on sovereign risk — I suspect that sovereigns default when the interest payments are more than structural budget deficit. At that point, it would pay for a government to default.

    Now I have something to cross-post at Aleph Blog. I didn’t think I would write that much when I started.

  7. ashpelham2 says:

    That was a great write-up David. Thanks for that. It’s just not fair to swipe a broad brush and say that ratings agencies are worthless, if not dangerous. However, as BR and yourself have reiterated, anyone buying a bond whose rating is dependent on a future result. We all know how the future is, even if we can “reasonably determine” it.

    Thanks again.

  8. OFT: (to save the expository..)

    “Cell phones show human movement predictable 93% of the time
    By Casey Johnston | Last updated February 23, 2010 5:02 PM
    We’d like to think of ourselves as dynamic, unpredictable individuals, but according to new research, that’s not the case at all. In a study published in last week’s Science, researchers looked at customer location data culled from cellular service providers. By looking at how customers moved around, the authors of the study found that it may be possible to predict human movement patterns and location up to 93 percent of the time…”
    http://arstechnica.com/science/news/2010/02/cell-phones-show-human-movement-predictable-93-of-the-time.ars

    QOTD:
    All of the great leaders have had one characteristic in common: it was the willingness to confront unequivocally the major anxiety of their people in their time. This, and not much else, is the essence of leadership. -John Kenneth Galbraith

    central theme(?) “the Blind leading the Blind..”
    ~~
    as an aside, Galbraith Jr., and another pretender to the Throne, Auerback, couldn’t carry JKG’s briefcase–even if it was hand-cuffed to their wrist..

  9. torrie-amos says:

    fwiw, and i could be wrong, it seems the rating agencies have a “season” also, when they put out there stuff, i just look at stuff in general too see if there are any stuff out of norm, in q1 2008 alot of downgrades all the time, didn’t seem like a good thing

  10. [...] Rating agencies: worthless in a bull market, damaging in a bear [...]

  11. Taliesyn says:

    Pure & Simple: revelations of how the top ratings agency gave clean AAA ratings to absolute warthogs proved the utter epic lie by the * Let the market go* free-marketeer moonies about the *private sector* being even willing, forget capable , of *policing itself*.
    Throw in the axiom that a regulation is only as good as it is *willingly enforced* and you have the God-awful *failure* of the one party gov’t from 2001 to 2006.
    Take the cop off the beat , or instruct him to just go to sleep , and shit happens!
    I rest my case.

  12. Taliesyn says:

    …and the late to the party Dems that the voters allowed to take over Congress did a perfectly lousy job of managing the market mess the previous admin left behind. A third party is desperately needed and being a Lou Dobbs *independent* works for me.
    ( Can’t believe that Kudlow has the gall to believe he can make a successful run for N.Y. Senator. The *only* upside is that it’s one of the only ways to get him off of CNBC. The downside is all that Kudlow blather on CSpan ;- )

  13. [...] Rating agencies: worthless in a bull market, damaging in a bear market – Big Picture [...]

  14. [...] This post was prompted by Barry’s article Credit Rating Firms: Worthless in a Bull market, Damaging in a Bear Markets. [...]