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From time to time I let an entire week go by without fulminating about credit ratings agencies (S&P, Fitch and so on). It has always been my view that these crowds are worse than useless - they will take the fee (from the company being ratd) and make an assessment which may or may not be fine at the time..
The problem for people who rely on those ratings is that after the initial rating, the ratings agencies are supposed to keep on top of stuff that might cause the rating to change. It has always been my view that they seem to rely on newspapers (or perhaps monthly magazines delivered to a PO Box that they don't check very often) rather than actually doing some genuine forward-looking analysis.
Consider the current ongoing debacle in the monoline insurers (AMBA, MBIA and so on) who grabbed for the brass ring in changing their core business away from insurance of muni bonds, towards insurance of CDOs and other subprime garbage. CEOs gotta sauce the earnings to get them $100 mill golden parachutes...
Now MBIA's share price has gone from over $70 last October to under $10 last week... and yet it is still rated AAA. Its bonds are priced at 70 cents in the dollar (give or take), indicating massive risk of default.
Ambac's share price was above 90 in May 2007, and last week it hit $4.50. And yet it is still rated AAA. Its bonds are likewise priced at around 70c in the dollar.
MAYBE S&P ought to have noticed that both Ambac and MBIA had leverage of greater than 140x, and that their underlying capital was a fraction of their exposure to a market which was known (at least by Rant readers) to have been toxic since 2004.
So why do S&P and Fitch still have a business? They never saw Enron coming, they never saw the subprime meltdown coming, they never saw the monoline disaster coming (despite the fact that everybody knew that MBIA and Ambac both insured CDOs which were leveraged composites of yet other CDOs... the so-called 'CDO-squareds').
Seriously, let's say I was a bond manager with mandate restrictions that said I could only hold stuff rated better than B. Let's say I was dumb enough to be guided by S&P's ratings in order to determine bonds to be included in my investable universe. If I was genuinely of the opinion that the ratings had value, I would be justified in loading up on CDOs; when it all went to crap, who is on the hook?
The answer should be S&P; but it's not. S&P's ratings are explicitly disclaimed as pretty much being something that you should never rely on.
You got that right...
