Why are we listening to those rating agencies

Remember the financial crisis of 2008? I know for a good number of Americans, hey that’s old news. These Americans prefer to watch sports or watch certain “stars” implode (Mel Gibson is the latest).

So, for those of you who remember the financial crisis & the post analysis of the crisis, you may recall the rating agencies – Moody’s, Standard & Poor (S&P) and Fitch (I believe) played a role in the financial crisis. What role was that? Oh, they gave AAA ratings (the highest) to the CDOs (collateralized debt obligations) that those investment banks such as Lehman sold to investors. And what did those CDOs consist of? Mortgages, especially those risky mortgages which have since imploded because homeowners for one reason or another could not make the mortgage payments as promised.

The rating agencies didn’t independently assess the viability of the CDOs. They just raked in the money. Hey thanks for NOT doing your job.

Thus my distrust of those rating agencies.

Apparently Wall Street and such equivalents around the world have forgotten.

Read a story the other day on the BBC app about how Moody’s has downgraded the Republic of Ireland and Moody’s was further hinting about another downgrade. Of course the rating agencies’ comments about downgrading Spain are fueling speculation that Spain will have to be bailed out next. And let’s not forget that the rating agencies downgrading Greece was paramount in the EU bailing out Greece. Now I do recognize these countries are carrying too much debt. But, IMHO, the rating agencies kicked these countries while they were already down on the ground.

You may think, well, that’s a European issue. Hold your horses. Because of the recent law signed by the President whereby the Bush era tax cuts are extended for an additional two years for ALL income levels plus the one year cut in the rate of Social Security tax collected from workers, the rating agencies are concerned that the debt at the federal level is TOO HIGH and have hinted the US may be downgraded.

In case this discussion seems way above your pay grade, think of it this way. The rating agencies are like the credit card companies. Before the financial crisis of 2008, the credit card companies extended huge lines of credit to you at very low interest rates. Post economic crisis, your interest rate has been jacked up and your credit line reduced, often significantly. Your credit utilization has jumped to above 30% because you were carrying debt but once the credit card company sliced your line of credit in half, the amount you owe is much higher. Of course this higher credit utilization negatively impacts your credit. Now, you understand what’s facing Greece, Ireland & likely Spain.


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