Just three short years ago, the ratings agencies including Standard & Poors dropped the ball to such a degree that they themselves were blamed by many for the financial crisis that rocked the world. Now I think it would be silly to only blame one party for that gargantuan mess, but there is no doubt the ratings agencies played their role. Now one of them is fighting back.
Many investors did not realize just how important these three agencies (S&P, Moody’s, and Fitch) are. They are responsible for rating the creditworthiness of many entities and the riskiness of many financial products. They wholeheartedly gave their seal of approval to a swath of complex securities that basically caused the housing bubble. These securities ranged from mortgage backed securities (MBS) to collateralized debt obligations CDO).
A Juicy FCIC Finding
The Financial Crisis Inquiry Commission reported in January 2011 that: “The three credit rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval. Investors relied on them, often blindly. In some cases, they were obligated to use them, or regulatory capital standards were hinged on them. This crisis could not have happened without the rating agencies. Their ratings helped the market soar and their downgrades through 2007 and 2008 wreaked havoc across markets and firms.â€
Bear in mind that volumes upon volumes have been written about these agencies, so a lot of that is beyond the scope of this column, but I wanted to bring to your attention just how important, and in the case of yesterday’s market crash, lethal they can be. Why should there be so much faith put into the downgrade of a firm that completely blew it during the lead up to the housing crisis? That is why I am surprised that the market was hit so hard in the aftermath. I thought there would be more skepticism amongst investors as to how much influence S&P still has.
Why Now?
Even more puzzling, the agency cited the political process as a major reason for the downgrade. Our politicians have been inept and fighting for over 200 years. So why a downgrade now because of their bickering? I think S&P wants to appear proactive and ahead of the game after falling asleep at the wheel a few years ago. Unfortunately for the rest of us, we have to live with the effects of their motives regardless of what they are. Let’s hope there aren’t any more proactive moves because there are only so many more times that the Dow can lose 634 points.
S&P Has Some SPlaining To Do is an article from: 
