Standard & Poor’s and other organisations like them.
Posted by: TomK on 20 September 2011
Their opinions seem to carry much weight in the financial world. Who are they, why are they qualified to make such pronouncements and why are their ratings apparently so important?
I'm afraid it's all a mystery to me.
Tom
I haven't got a clue either. Hope someone here can shed some light.
But I guess Jim will be along soon telling you to do some research. After youv'e got your PhD in the subject, then and only then, will you be permitted to ask such intelligent questions
Cheers
Don
Probably tells you all you could wish to know, without getting too much into the politics of it (or the money...)
http://en.wikipedia.org/wiki/Credit_rating_agency
They were acting with what seems to be a clear conflict of interest in that they were being paid by the banks to rate their own debts so that they could be securitised. They were working for and being paid by the banks to rate these debts, so is it any surprise they 'got it wrong'. Would they have got further work and received thse fees if they'd given lesser ratings? Maybe I'm too cynical.
And yet when they now tak about companies and nations being 'junk' status, everyone listens. With their track record this does seem a little strange.
Rant over !
Probably tells you all you could wish to know, without getting too much into the politics of it (or the money...)
http://en.wikipedia.org/wiki/Credit_rating_agency
Thanks Jamie. I actually had seen some of this already but it still didn't really answer my questions. I guess I should have asked what do they ACTUALLY do, why do we put such trust in them, and who pays them?
Well the problem is partly that they aim to 'quantify' what everyone who is bothered already knows anyway.
They are perenially late in the game, as it were. The problem is then exasperated by the fear that if it's not rated in ain't worth sh*t. Ergo if it carries a rating, then all is known. And good. Because markets and business and consultants want to 'know'. The unknown is feared. Even if everyone already knows (!)
In the UK, the FSA is forever keen to point out that the past is no guide to the future. While for all their "...situation could get worse..." warnings, ratings are by nature based on theories which boil down to what has happened could/may/is likely to influence the future. So, if something has been strong, it likely gets 'rated'. If it hasn't, it likely doesn't. So I've never been able to fathom how that sits with the 'past is no guide to the future' shtick.
Edit: They are largely paid by many of those they rate.
Yes, their opinions carry a lot of weight. But remember these were the people right in the thick of the sub-prime crisis as N66 points out. Here's the infamous exchange between two unidentified Standard & Poor officials about a mortgage-backed security deal in 2007:
Official #1: Btw (by the way) that deal is ridiculous.
Official #2: I know right...model def (definitely) does not capture half the risk.
Official #1: We should not be rating it.
Official #2: We rate every deal. It could be structured by cows and we would rate it.
For some background reading on the current crisis from a broad social democratic perspective try Jeff Madrick's of Age of Greed: The Triumph of Finance and the Decline of America, 1970 to Present. Thanks!
They say they are "far from politics",when rate something.I'm doubtful.Yesterday S&P downgraded Italy from A+ to A because 1)its public debt is to high:everybody knew this before,2)its bonds loose 28%:everybody knew this before,3)its recently approved fiscal measure seems to be too weakid everybody know this before?Ehm…yes,they did…As a matter of fact European stocks din’t care yesterday and all were positive.
So I agree with Jamie.
Good link Mike. I think it answers Tom's question very nicely. No doubt the "experts" will tell us it over-simplifies the whole business and is therefore misleading but....................phew!, it saves having to pay Jim his exhorbitant fee.
Credit rating agencies will only stay in business as long people want to pay for their services. If most people think their advice is unhelpful, they will go out of business. Of course, what is "helpful" and what is "unhelpful" might mean different things to different people. But I imagine that if the Big3 make accurate assessments of the risk of lending to Greece, Italy, the UK, Barclays, The Emirates, Apple, China etc etc, they will stay in business as Agencies.
No doubt there will be new startups in this business soon from China, Brazil and India.
Cheers
Don
Thanks for the replies. Some useful info here, most of which sadly confirms my feeling that the financial world is well dodgy.
Relatively few know they exist, but the champagne swilling, cigar smoking, banknote waving banker is a fixed image for many; easier/better for politicians to blame it all on the public school boy/barrow boy made good...until their country/ies become the focus.
Dodgy, yes, as are the rest of us who took part in the Big Party.
Cheers,
OW