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June 26, 2012

Do Credit Ratings Still Matter?

“In the four years since the banking crisis began, a familiar pattern has emerged regarding the nation’s credit ratings agencies: One will issue a downgrade, and the market generally reacts with a collective shrug of the shoulders.

When Standards & Poor’s decided last summer to downgrade the U.S., investors responded by purchasing even more U.S. debt. The same was true for U.K. debt in February after Moody’s Investors Service issued a “negative” outlook for the nation. And on Friday, one day after Moody’s downgraded 15 of the world’s largest banks, investors responded by sending up shares of the affected firms.”

“Nonetheless, that lingering skepticism is worrying, says Dennis Kelleher, the president and CEO of the Wall Street watchdog firm Better Markets. If anything, last week’s downgrade should have been read as a warning that even the biggest banks in the country are just “marginally solvent.” Instead, he said, the market is ignoring the announcement and “counting on the Fed bailing every one out again.””


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