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August 8, 2011

Stop Downplaying the Rating Agencies Role in Financial Crisis

The Wall Street Journal has an interesting and important article today on the credit rating agencies entitled “Ratings Firms Retain Power Over Markets.” 

This line caught my attention: “Standard & Poor’s decision to yank away the U.S. government’s vaunted triple-A rating is a vivid reminder of the bond-rating industry’s power even after setbacks in recent years.”


Let’s see.  Those rating agencies put Triple A ratings on some of the most complex derivatives ever created, telling the world they were as safe as the safest investments in existence.  This is no minor point.  At the time (and today for that matter), the law strictly limited many pension and mutual funds from buying anything other than Triple A rated securities.  Similarly, many investors limited their investment advisors from buying anything other than Triple A rated securities. 

Thus, as a direct result of those Triple A ratings, everyone from pension and mutual funds to Moms and Pops bought those unbelievably complex derivatives solely because the rating agencies said they had virtually no risk at all. 

Without credit rating agencies giving Triple A ratings to those derivatives, there wouldn’t have been a market for them.  It is not an overstatement to say that there would have been no financial crisis without those Triple A ratings.  Credit rating agencies said hundreds of billions if not trillions of dollars of mortgages and the derivatives created from them were Triple A risk-less securities. 

Not only were they not risk less, many or most of them were simply worthless.  Yet, they were stuffed throughout the world’s financial system because of their Triple A rating.  While there is some dispute about the details, there is no legitimate debate that the cost of the financial crisis has been trillions of dollars.  That doesn’t include the unimaginable intangible human costs from millions of people losing their homes, jobs, retirements, savings, and, too often, hopes for the future.  The devastating consequences of that crisis continue today with historically high unemployment and foreclosures, among many other things.

“Setbacks”??  How about abysmal failure?  How about egregious misconduct?  How about why isn’t this criminal?  Or, why are they still in business or not in jail or fired or required to give up all the profits they stuffed in their pockets when they slapped Tripe A ratings on toxic securities?

The role of rating agencies in the financial crisis was essential to the crisis from ever happening and it is too often unstated, misstated, unrecognized or obscured.  That is as egregious as the rating agencies conduct.



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