Do Credit Rating Agencies Cause Market Volatility and Profit from It?
After hearing that one of the big three credit rating agencies downgraded countries in Europe, I wondered what would happen to the stock market on Monday, 2/13/2012. Sure enough, it went down.
Downgrades of countries, organizations and companies by the Moody’s Investor Service, Standard & Poors and Fitch Rating Service seem to affect the market like lemmings or someone yelling fire in the theatre. “Run for your lives, the credit rating agency just downgraded that company or country or organization!”
Why do we believe these credit rating agencies, especially when they have gotten it wrong many times like in the subprime crisis? Unfortunately, no real definitive multi-trillion dollar amount has been pegged to the huge black hole on Wall Street and the world economy cased by the subprime crisis. However, a U.S. Congressional Report blamed the recent massive financial crisis on the manipulation of credit ratings by the big three credit rating companies.
According to this article in the Huffington Post, the staff for Senators Carl Levin and Tom Coburn of the U.S. Senate committee that investigated the causes of the financial crisis wrote in the report:
“Perhaps more than any other single event, the sudden mass downgrades of (residential mortgage-backed securities) and (collateralized debt obligations) ratings were the immediate trigger for the financial crisis.”
“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.”
It’s too cosy cosy on Wall Street. It’s like a horse race. When the big credit rating agencies set the ratings, the hedge funds, the day traders, and Wall Street seem to jump. Perhaps it is time to tame the credit rating agencies effect on the world economy. Perhaps they enjoy too much undeserved power. Their ratings make it more difficult for struggling countries to get out of debt. This in turn causes a cascade of problems for the citizens of those countries.
What would happen if Wall Street was unmoved? It’s like the boy who cried Wolf. The problem is that the wolf-cryer has real potential negative affects on people and entire countries and the world economy. Too too much power.
Rate the Rating Agencies!
It’s time to take that power back. What needs to change are the dynamics of the market as soon as the credit rating agencies make a change – either up or down – for their ratings. These companies are unelected by the people of the world, yet they have so much power over people. Why? Isn’t it time this changed once and for all?
S&P Inside Job? ‘Somebody made big bucks on US downgrade’