Moody’s in the Mood for Overcompensation

Employees at Moody’s are working overtime in release credit rating warnings and downgrades. After setting Europe aflame, they moved to the US. They might return to downgrade Spain and Italy. Soon. Isn’t it time for a summer vacation? They had long summer vacation in 2008.

Some of the countries that are hurt are attacking the rating agencies as means of defense. They sound like children who can’t response to criticism and find something wrong with the other child that criticized them. But their attack on rating agencies is sometimes justified:

A blast from the past

Rewind to 2008, and actually 2007 and 2006: Companies in the financial sector such as Lehman Brothers for example, where performing “securitizations” of mortgages: wash, rinse,repeat. These über sophisticated financial instruments were then presented to rating agencies.

In way too many cases, they were rubber stamped with a perfect Triple A rating. Other AA, A+, A were handed out like confetti. Some of them included very “toxic” assets – very unrealistic mortgages, to say the lease.

It wasn’t only the CDOs. Also Lehman Brothers and AIG had high ratings just before the falls. Where were Moody’s, Fitch and S&P?

Clinging on to Power

The more important question is: how are they still in business? Or at least, how did this troika continue to have exclusivity on ratings?

The excessive power that rating agencies have rightfully angers the Portuguese, the Greek and the Irish.

All three countries are in junk status. Greece is still in trouble, sure. It may default. But Ireland is right on track. Portugal just began applying austerity measures, and vowed to make them stronger than anticipated. So why downgrade them now?

It seems that Moody’s and also S&P and Fitch to a lesser extent, are overcompensating the dark past. Instead of making cold assessments, they are just throwing fuel to fire, being very “pro-cyclical” as Trichet says. In this case, the wheels are moving downhill quite fast.

Contrary to European countries, silk gloves are used for the US. Here, no downgrades are made. Only hints to push the politicians into action. Moody’s has a helpful role in the US, but no so helpful in Europe.

The significance of this help is doubted as well. It is common knowledge that the politicians in Washington will reach some kind of agreement at the last minute. That’s what happened with the government shutdown issue. Is Moody’s really helping there?

So, I can surely understand Europeans with their antagonism towards the rating agencies, even if one of them is French owned: Fitch.

Further reading: Europe needs a rate cut. Now.