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October 5, 2011

Seriously: Rating Agencies Getting Tough – NOW?

The Wall Street Journal has a front page story entitled “At S&P, a Crusader for Tougher Ratings.”  It’s about S&P’s new chief credit officer who is reported to be very, very tough because he is insisting that Triple A ratings only be given out when they are appropriate. 

That’s what passes for tough now-a-days.  A credit rating agency that seems to be requiring companies to meet the standards for the rating they are assigned.  Wow.  Things really are changing.  Of course, this has nothing to do with the many government investigations focusing on S&P’s and the other rating agencies’ actions before and during the 2008 crisis, when it seems that the only requirement for a Triple A rating was to ask for one, oh, and write a big check to the rating agency.

Let’s not forget exactly how egregious their conduct was back then.  The attached chart from the article shows how bad their conduct really was (& if anything understates it) and the following facts make it crystal clear:  “S&P downgraded nearly 17% of its Triple-A-rated structured finance securities in 2010. That’s almost double the amount downgraded by Fitch Ratings and nearly triple the amount downgraded by Moody’s Investors Service during the same period, though each firm’s ratings express slightly different measurements of a bond’s safety. Among sovereign government bonds that are rated by both S&P and Moody’s as of September, S&P had lower ratings in 25 cases, and Moody’s in 21.”

There would have been no 2008 crisis if the rating agencies didn’t slap Triple A ratings on worthless and toxic derivatives and securities.  Those toxic products would not have been stuffed into mutual funds, pension funds, retirement accounts, bank’s balance sheets, etc., worldwide without those ratings.  Rating agencies might not be MORE culpable than others who created and enriched themselves from the mountain of fraud that was at the core of the crisis, but they certainly are AS culpable. 

Good to know that S&P has hired a tough guy to clean up its pathetic act, but that’s easy and pretty minimal (even if they lose a little market share to competitors).  When you’re in the gun-sights of the government and you’re worried about ongoing investigations, lawsuits, & liability, such actions are pretty common.   What isn’t common and would concretely demonstrate a real change would be for S&P’s directors to actually hold people accountable (fire, demote, claw back pay, sue, etc.), conduct a full investigation and publicly disclose the results, admit its culpability and do everything possible to do right by the many people and organizations its conduct damaged. 

THAT would be newsworthy and THAT hasn’t happened and it isn’t going to happen.  S&P, like Wall Street and the rest of the financial industry that gave us the meltdown that continues to destroy wealth and dreams, has denied all culpability and fights all claims made against it. 

Self-serving, after-the-fact attempts to get their house in order while the shadow of the crisis still hangs over their heads and wallets should count for very little.  More importantly, such window dressing should in no way prevent the government and others from holding the rating agencies and their officers accountable for their egregious conduct in connection with the crisis.

Only actual accountability has any chance to increase the likelihood that, when the heat dies down, new tough chief credit officer Mark Adelson will still have a job.  Remember, there were other Mark Adelsons before.  They were all silenced, let go or moved on when they got in the way of all that money rolling in the door in 2004 – 2008. 



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