Why do markets still pay attention to what rating agencies have to say? Following their appalling record predicting the subprime mortgage crisis, it is astonishing and sad that investors still seem to quake when Standard & Poor’s junks Greece and downgrades Spain.
By Hugo Dixon and Richard Beales
Were the investors who lost $1 billion by buying a fearfully complex product sold by Goldman Sachs in the dying days of the credit boom fools or victims? That’s the key distinction on which the U.S. Securities and Exchange Commission’s fraud charges, which roiled the investment bank when they were unveiled on Friday, hinge.
Europeans won’t be amused by the alleged Goldman Sachs scam. ABN Amro, and therefore ultimately Royal Bank of Scotland, ended up losing $841 million in the allegedly fraudulent collateralised debt obligation investment concocted by the investment bank. Meanwhile, IKB, the bust German bank, lost nearly $150 million.
How can a country support debt of over 100 percent of GDP for many years and then suddenly start spiralling towards insolvency? That question of sovereign debt maths is not merely academic. It is highly relevant to the likes of Greece and Italy.