The Ratings Game

Is it free speech? Or a legal opinion?

That’s the question being asked about credit agency reports. During the sub-prime bubble, Moody’s and S&P offered opinions about the bonds’ credit quality. The idea that if you pool a lot of delinquent borrowers buying McMansions with nothing down together and you can create a Aaa bond is ludicrous now, but it didn’t seem so then So now some folks want to take it out of their hides. In the past, the agencies have argued that what they say is “just an opinion,” and protected under the first amendment. That’s silly. Agency opinions carry the force of law and define what many can invest in. There ought to be some accountability.

While it seems ridiculous to liken a Aaa rating to an editorial cartoon, I can see the wisdom in not bankrupting the agencies by blaming them for the banking crisis. We’ve lost, what, some $2 trillion, and these companies are worth about $15 billion. Not very much to offer – and for that we’d cripple an industry that we need.

No, the point is to define the rules going forward. Credit rating agencies are fiduciaries, and should be held to a fiduciary standard. But like fiduciaries, they should be protected from Monday-morning quarterbacks. In the meantime, there’s one rule that always holds: let the buyer beware.

Douglas R. Tengdin, CFA
Chief Investment Officer
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