Credit Rating Agencies - A Farce??

When we look to make for investments, what are the things we analyse and keep in mind before taking any decisions??? Return...Time Period...and most importantly creditability!!!

How do we know the creditability of the instruments we are trying to invest in? Most of the time we are generally aware of some of them as the underlying entity or the reference entity is well known, has a public image and is probably a large corporate with strong financials. But what do we do in case we don't know the details so well??

We fall back on the judgement of institutions called Credit Rating Agencies. Some of the largest agencies are Standard's & Poor's, Moody's and Fitch. If they rate some financial instruments strong, we think of investing in them or otherwise we don't.

The question is how credible is the ratings of these agencies. Can we really rely on them? Here are a few examples I would like to site -

1) The CDOs issued by institutions in USA against sub-prime loans - Most of the loans which went bad, were given some of the top ratings by credit rating agencies just a few days before they went bad!!

2) Lehman Brothers, AIG, Freddie Mac & Frannie Mae, Merrill Lynch - These companies either went bust or were on the verge of bankruptcy or required financial bailout. However, just a few days before these events took place, their credit ratings were quite strong and high.

3) USA, GREECE, IRELAND - When recession hit, USA, Greece, Ireland, Britain, Germany, Japan, Spain, etc. were some of the countries which were impacted the most. Yet before the situation of these countries were made public, their ratings remained the same and decently good since a long time. But when the exact situations were made public, the ratings of some of them were changed. Greece for example needed bailout. While the rating of the country was changed only after the news of bailout came.

So why do we need credit rating agencies if their ratings cannot be relied upon. Even a common individual with no knowledge of business and finance would be able to lower the creditability of a corporate or a country after knowing that they require bailout.

So, do these agencies have any liability or do they have to answer these questions??

The answer is no. These agencies have no liability, no obligation, etc. even if their ratings are wrong and cannot be relied upon!!

I guess its time to question the creditability of these Credit rating Agencies themselves to find out the truth. But, interestingly it would be difficult to establish the creditability of the people/firms trying to find out!!!

A VICIOUS CIRCLE OF MISTRUST!!!