Fury brewing at ratings agencies as markets gyrate

August 9, 2011

Carnival revellers are silhouetted as they carry a burning wooden wagon in Liestal, near Basel, February 21, 2010.  REUTERS/Michael BuholzerSo let me get this straight.

Ratings agencies helped spark the financial meltdown of 2008-9, when they deemed that steaming piles of mortgage junk were brimming with triple-A goodness. They were wrong – and epically so.

Now S&P downgrades the debt of the entire country, further threatens to do so another notch, teams with fellow ratings agencies to bring Europe to its knees with each new appraisal and gets an assist for wiping trillions in wealth from investors’ portfolios in just a few days.

Anyone else think the ratings agencies need a time out?

“If you had asked me a couple of years ago if they could do anything more destructive than the mortgage debacle, I would have said never,” says Roger Kirby, Of Counsel for New York City law firm Kirby McInerney, who is involved in a class action against Moody’s on behalf of shareholders. “But it seems they’re managing to do it again, right now. In order to restore their damaged reputations, they’re interjecting themselves unsolicited into sovereign markets.

“It’s not productive, it’s probably inaccurate, and they’re just going out there on their own with no real purpose to what they’re doing. When future historians are writing about this period, they will probably single out ratings agencies as the single most destructive collection of entities.”

It’s not just an academic exercise. The musings of the ratings agencies are having very real effects on people’s portfolio. In the first day following S&P’s downgrade of U.S. debt from triple-A, another trillion was erased. As a result, some individual investors are starting to do a slow burn about how ratings agencies are stoking financial chaos.

“It’s definitely hit me personally,” says Andrew Schrage, an editor for the personal-finance website MoneyCrashers.com in Chicago. “Anyone in stocks has been thoroughly wiped out. My personal accounts, and retirement savings like my Roth IRA: I was very aggressively in stocks, so I’m down about 15 percent in just the last few weeks. Now I’m not even sure if we’re going to be able to dig our way out of this.”

What worries Schrage is not necessarily the underlying creditworthiness of U.S. debt – does anyone really think Treasuries won’t be honored? – but that a vicious cycle of downgrades will hobble the stock market for the long term and doom a highly fragile recovery. After all, any currency or country or asset class is only as secure as investors’ confidence in it. Take that away, and all bets are off.

“There’s definitely a psychological aspect to it,” says Schrage, 24, who’s re-evaluating his entire investment approach in response to the wild volatility. “People just hear ‘downgrade,’ and they get scared and sell off. Meanwhile other countries start charging us higher interest rates, even though the fundamentals haven’t really changed in the last few weeks. It’s having a very corrosive effect on the U.S. economy.”

The brewing fury at ratings agencies is also making for some strange political bedfellows. Said famed conservative George Will: “Standard & Poor’s would have forfeited its good reputation, if it had a good reputation to forfeit these days … Their opinion isn’t entitled to any particular respect.” And wrote New York Times columnist Paul Krugman, from the liberal camp: “S&P is just making stuff up — and after the mortgage debacle, they really don’t have that right. So this is an outrage … these people are in no position to pass judgment.”

Nevertheless, ratings agencies are firing off fresh rounds almost daily, and panicked investors are apparently listening closely. For a preview of what’s in store, says Kirby, just cast a glance towards Europe. Enraged finance ministers have been vowing to take on the “oligopoly” of the ratings agencies, for so casually setting off financial contagion.

“Italy was stronger than most countries in the EU, but as soon as the ratings agencies opened their mouths, yield spreads shot up and it was really in trouble,” says Kirby. “Ratings agencies have no business at all sticking their noses into this arena. They’re doing real harm, because what they prophesy becomes self-fulfilling. They’re playing a very dangerous game.”

 

 

13 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

Since the financial mess started in 2008 the one thing that has been lacking is an ultimate villian. Sure there are plenty of people and institutions that clearly are at fault but no single person or group, not Goldman Saks, not FannieMae, not Richard Fuld, not George Bush or Barack Obama no one who served as a univeral punching bag.
Thank you Standard and Poors for filling that void. At last the country has something that unites us.

Posted by bumticker | Report as abusive

[…] pushing back against a US government proposal that would require credit raters to disclose …Fury brewing at ratings agencies as markets gyrateReuters Blogs (blog)Law from 2006 gives SEC scope to probe S&PMarketWatchInternational markets […]

Posted by REFILE-S&P balks at SEC proposal to reveal rating errors – Reuters | Mobile News World Magazine | Report as abusive

Great article!
Is any country going to have the huzpa to go after these sheisters? I see a prosecutor in Italy has frozen their local S&P office. While the other countries fiddle as Rome and London burns.
I would have expected that after their AAA ratings of the phoney derivative vehicles to be pulled just after everything tanked in 2008; some countries would have woken up by now and some of the leaders of S&P would be in jail. No way!

Why not? Because the individuals at leadership at S&P for the most part come from….wait for it….wait for it….THE LARGE BANKS.

But as I research this problem there is a way to get around these problems in the short run, outside of hauling the S&P mobsters into court and asking them who is shorting the bond market for various countries(maybe some relatives, maybe themselves?)

Do what Greece has done: for two months no shorting will occur in the entire country. I like this approach and as I look at the bond landscape who could be next? Your weakest bond player in Europe is BELGIUM.

If anyone is in Belgium your politicians can avert short term disaster by implementing two things immediately:
1. Eliminate Credit Default Swaps.
2. Eliminate shorting of govt bonds.

Bingo there ya have it, no incentive to muck around with ratings. Again, great article.

Posted by Independent007 | Report as abusive

Hi all,
the article itself is fine but it comes rather late! This only shows what the claims and worries of small peripheric countries like Greece and Portugal where right! Rating agencies are missleading investors and the consequences will bring even the most strong economies to their knees!

Posted by bstospn | Report as abusive

Great to see someone voice so well what I’ve been commenting on ad nauseum for months. It’s way past time to pull the teeth from these sharks and send back into the sea as the gummy fish they really are. That institutions with such a litany of failure behind them can be taken seriously by anybody is a mystery that still puzzles me. Entire countries (including my own, Ireland) have been brought to their knees at the stroke of a pen by people who have proved unable to do basic math.

@Independent007. You’re spot on about outlawing shorting of government bonds and CDSs. And then I’d like to see the offices of the agencies in every country in which they operate rooted through by the police (as has already happened in Italy). I have no doubt whatsoever that there lurks in these offices evidence of dubious practise of one form or another.

It’s time to get off the fence and hit back.

Posted by Hewson | Report as abusive

Downgrading USA base in government bond alone is not reasonable, Considering the US economy is very diverse, just
because of Default swap, after a week they made Statement, How a researcher concluded in that very short time.

Posted by lliamydale | Report as abusive

Nonsense. Stocks were well on their ways into a correction before the debt downgrade. We have a Congress that can’t zip the purse strings, a central bank that is fervently trying to debase our currency, and a president who is anything but market savvy. And now people want to blame S&P for simply expressing an opinion? Maybe if individuals actually did their investment homework instead of blindly expecting stocks to go up ad infinitum, they wouldn’t get wiped on periodically. Besides, why is it such a bad thing when prices go down? Most people generally like to buy things more cheaply.

Posted by thedocument | Report as abusive

Wait just a second. Just because they got it grossly wrong with the mortgage-backed securities doesn’t necessarily mean that they are getting it wrong with the sovereign debt. Seems to me that keeping these various sovereigns at AAA or the like would just be doubling down on the mess they made with mortgage-backed securities. This is a case where you may indeed be killing the messenger. The US has real issues that bely anybody thinking it should maintain a AAA rating. If anything, the agencies were too slow again. But when they finally begin to catch up, don’t complain because they are catching up. So you were long in stocks? Wah-wah-wah. You’ve seen this coming ALL summer. Sounds to me like you were just chasing profits and were caught. Get over it.

Posted by Laughter | Report as abusive

Well spotted and well written.

Posted by Kitko | Report as abusive

When Warren Buffett says you’re full of s$%!, you have a serious credibility problem.

Posted by yrbmegr | Report as abusive

They have a motive, just like they had a motive in the sub-prime fiasco: to enrich themselves and their cronies on Wall Street. By threatening to downgrade unless the US cuts its deficit, they are lending a hand to the Tea Party so that no funds will be available to oversee Wall Street and their partners, the ratings agencies. What they proved throughout the sub-prime debacle was not that they got it wrong, but that they were no longer an impartial observer. They are in it for their own game, hand in hand with Wall Street.

Posted by lhathaway | Report as abusive

As Jack Nicholson would say “The Truth? You Can’t Handle the Truth!”

Posted by jhchang | Report as abusive

And lets get one thing clear, I was out of the market months ago. And another point. I actually agree with S&P’s decision.
I suspect their motives though. Especially when they were part of the kabal that caused this in the first place.

Answer me this anyone on this board. Would the US have been downgraded if it didn’t bailout the banks and didn’t start a phoney war in Iraq?
My answer: NO. Am I wrong? Do the research and come back at me. That is the big picture. And during this time, S&P was ABSOLUTELY colluding with the banks and giving their fraudulent mortgage vehicles AAA ratings. So forgive me if I question their motives now, its well deserved.

Posted by Independent007 | Report as abusive

So S & P dropped the U.S. rating below AAA. I wonder if they ever took the time to go back and change the rating on Enron and all the others they missed on?
Now they’re talking about a downgrade for Fannie and Freddie who EVERYONE knows is underwater. These guys have “0” credibility.

Posted by jjd | Report as abusive