The Ratings Game

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Despite Wall Street’s peculiarities and never ending scandals, there always seemed to have been some information available which you presumably could rely on and which served as a resource with integrity.

Well, that seems to have changed now too due to the current credit crisis. Michael Shedlock’s article “Any Credibility Left At Fitch,” sheds some light on (credit rating service) Fitch’s approach to lowering credit ratings. I always thought that a rating company would/should be unbiased and issue ratings based only on facts and no other potential implications. That credibility went out the window when Fitch stated the following:

Fitch recognizes that financial guarantors view maintenance of their ‘AAA’ ratings as a core part of their business strategies, and management teams will take any reasonable actions to avoid a downgrade.”

Huh? To avoid a downgrade? Why? If a company’s debt has become junk, it needs to be downgraded no matter whether there are grave implications or not. Any action to the contrary will make the function of a rating company obsolete.

If you invest in bonds or other interest rate sensitive instruments, you better think twice before silently acknowledging that AAA rating. It may not be worth the paper it’s printed on.

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