Posts Tagged ‘Ratings Agencies’

Rating Rhetoric

This post is by Marie Cairney, an Associate Director in our Financial and Professional Services team:

Only a few years ago rating agencies were being lambasted by investors, financial institutions and governments alike for their role in the unholy financial mess of 2007-2009. Prior to the crisis, trust in the Big Three agencies ratings on corporates, financial institutions and mortgage-related securities was high. This created a world where investment decisions were more or less made based on a couple of letters of the alphabet. Credit crunch finger-pointing blamed institutionalised ‘bad calls’ on the part of rating agencies as a major factor precipitating the crash. Blaming someone else for allowing you to do something that you knew was inherently stupid never looks good but a lack of transparency and competition in the ratings industry made the agencies a valuable commodity in the scapegoat market and let’s face it, they did get it wrong even if it was along with everybody else.

Ratings agencies assigned 'AAA' designations to exotic securities pre-2007, which led to a bubble of investor confidence in these products (Image: CNBC)

Fast forward five years and rating agencies are still here and still apparently creating mayhem; this time in the sovereign debt markets. Perhaps determined not to get it wrong again, they are all over Eurozone and US deficits and debt. Instead of building faux-investor confidence though, they are, according to beleaguered country governments, wrecking it. Damned if you do, damned if you don’t one might think.  “It wasn’t me, it was them” seems to have been replaced by “It’s not fair” as the key criticism of rating agencies in the global financial playground, with successive Prime Ministers, Presidents, and Chancellors publicly livid with their new grades.

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