Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
How to Use Price Cycles and Profit as a Swing Trader – SPX, Bonds, Gold, Nat Gas - 13th Nov 19
Morrisons Throwing Thousands of Bonus More Points at Big Spend Shoppers - JACKPOT! - 13th Nov 19
What to Do NOW in Case of a Future Banking System Breakdown - 13th Nov 19
Why China is likely to remain the ‘world’s factory’ for some time to come - 13th Nov 19
Gold Price Breaks Down, Waving Good-bye to the 2019 Rally - 12th Nov 19
Fed Can't See the Bubbles Through the Lather - 12th Nov 19
Double 11 Record Sales Signal Strength of Chinese Consumption - 12th Nov 19
Welcome to the Zombie-land Of Oil, Gold and Stocks Investing – Part II - 12th Nov 19
Gold Retest Coming - 12th Nov 19
New Evidence Futures Markets Are Built for Manipulation - 12th Nov 19
Next 5 Year Future Proof Gaming PC Build Spec November 2019 - Ryzen 9 3900x, RTX 2080Ti... - 12th Nov 19
Gold and Silver - The Two Horsemen - 11th Nov 19
Towards a Diverging BRIC Future - 11th Nov 19
Welcome to the Zombie-land Of Stock Market Investing - 11th Nov 19
Illiquidity & Gold And Silver In The End Game - 11th Nov 19
Key Things You Need to Know When Starting a Business - 11th Nov 19
Stock Market Cycles Peaking - 11th Nov 19
Avoid Emotional Investing in Cryptocurrency - 11th Nov 19
Australian Lithium Mines NOT Viable at Current Prices - 10th Nov 19
The 10 Highest Paying Jobs In Oil & Gas - 10th Nov 19
World's Major Gold Miners Target Copper Porphyries - 10th Nov 19
AMAZON NOVEMBER 2019 BARGAIN PRICES - WD My Book 8TB External Drive for £126 - 10th Nov 19
Gold & Silver to Head Dramatically Higher, Mirroring Palladium - 9th Nov 19
How Do YOU Know the Direction of a Market's Larger Trend? - 9th Nov 19
BEST Amazon SMART Scale To Aid Weight Loss for Christmas 2019 - 9th Nov 19
Why Every Investor Should Invest in Water - 8th Nov 19
Wait… Was That a Bullish Silver Reversal? - 8th Nov 19
Gold, Silver and Copper The 3 Metallic Amigos and the Macro Message - 8th Nov 19
Is China locking up Indonesian Nickel? - 8th Nov 19
Where is the Top for Natural Gas? - 7th Nov 19
Why Fractional Shares Don’t Make Sense - 7th Nov 19
The Fed Is Chasing Its Own Tail; It Doesn’t Care What You Think - 7th Nov 19
China’s path from World’s Factory to World Market - 7th Nov 19
Where Is That Confounded Recession? - 7th Nov 19
FREE eBook - The Investment Strategy that could change your future - 7th Nov 19
Is There a Stock Market Breakout Ahead? - 6th Nov 19
These Indicators Aren’t Putting to an Economic Resurgence - 6th Nov 19
Understanding the Different Types of Travel Insurance - 6th Nov 19
The Biggest Gold Story Of 2020 - 6th Nov 19
Best Money Saving FREE Bonfire Night Fire Works Show Sheffield 2019 - 5th Nov 19
Is the Run on the US Dollar Due to Panic or Greed? - 5th Nov 19
Reasons Why Madrid Attracts Young Professionals - 5th Nov 19
Larger Bullish Move in USD/JPY May Just Be Getting Started - 5th Nov 19
Constructive Action in Gold & Silver Stocks - 5th Nov 19
The Boring Industry That Hands +500% Gains - 5th Nov 19
Stock Market Chartology vs Fundamentals - 4th Nov 19
The Fed’s Policy Is Like Swatting Flies with Nuclear Weapons - 4th Nov 19
Stock Market Warning: US Credit Delinquencies To Skyrocket In Q4 - 4th Nov 19
Stock Market Intermediate Topping Process Continues - 4th Nov 19
Stock Market $SPY Expanded Flat, Déjà Vu All Over Again - 4th Nov 19
How To Buy Gold For $3 An Ounce - 4th Nov 19

Market Oracle FREE Newsletter

How To Buy Gold For $3 An Ounce

The Coming Collapse of International Credit Ratings Agencies - Moody's, Standard & Poor, and Fitch

Stock-Markets / Global Financial System Feb 06, 2008 - 02:23 PM GMT

By: Alex_Wallenwein

Stock-Markets Best Financial Markets Analysis ArticleSo you thought the Ambac/MBIA bond insurers crisis was bad?

You ain't seen nothin' yet

The problem, the challenge, the scandal, is not that the bond insurers are about to be downgraded. The real scandal lies in the fact that they haven't been downgraded a long time ago - and much deeper than from "AAA" to "AA". In fact, what needs to be downgraded are the major international credit ratings agencies, Moody's, Standard & Poor, and Fitch.


Ironically, they are already in the process of downgrading themselves. Moody's, for example, recently issued a statement cautioning investors not to rely on its ratings so exclusively. Ha! That's like a corporate CFO saying investors shouldn't rely on the company's financial statements so much when making their decisions.

Why Downgrade the Ratings Agencies?

Why do they need to be downgraded? Because the top three or four ratings agencies are ridiculously behind the curve when it comes to letting investors know about problems with the entities whose credit standing and investment outlook they (pretend to) rate. The reason for that appears to be an unresolvable conflict of interest which emanates from how these agencies get paid. They get paid for their services by the companies (and governments) whose performance they rate.

Somewhere in the distant past, in the early 1970s, they were paid by the investors who needed to tap them for their information so investors could make educated judgments on investment risks. That is no longer so. Now, they serve two masters at the same time - but only one master really gets the benefit: the one who pays them.

Unfortunately, the ones left in the dust in this scenario are the world's institutional and professional investors, and they are largely the ones who most influence the prices of investment products.

What's the Big Deal?

The ratings agencies are the paper investing world's equivalent of an air traffic control system. Particularly institutional investors rely on them almost exclusively when deciding whose debt paper to buy and whose to ditch.

Picture yourself as the pilot of a big airliner. It is nighttime, it's foggy, and you need to land. The question is: are the runway and the landing approach clear? You communicate with the tower of the airport of your destination, and you hear: "Oh sure,go ahead" through your earphones, so you commence your landing approach.

What you don't realize, though, is that the way the air controllers get compensated has just been changed.

No longer do they get bonuses for sterling records of no accidents over a period of time. Now, they get paid extra if they can manage to land as many airliners as possible - simultaneously!

You can probably see where that might cause a little problem.

In other words, you can't rely on the air controllers' directives anymore - but you don't know that. So you crash-land your plane, only narrowly escaping an in-air collision with another plane, and then you start asking questions.

The world's institutional investors are as dependent on the accuracy of the agencies' ratings as airline pilots are on air traffic controllers, but just like in our analogy, the change in payment structure has compromised the interests of the recipient of the information.

One result of this conflict of interest is that, according to an interview with Sean Egan of Egan-Jones Ratings aired on CNBC Friday, February 1, 2008, the ratings agencies' bank and Wall Street investment house customers have actually exerted pressure on the agencies to issue ratings on CDOs - the very subprime mortgage-backed instruments that caused the current credit crunch!

As if that wasn't bad enough, the ratings agencies then reportedly began to demand that bond insurers develop "mutiple streams of income" in order to get their coveted "AAA" ratings - and that entailed insuring CDOs as well, which ultimately benefited their customers, the bankers, who wanted to push that toxic stuff into the markets.

Naturally, the agencies bowed to their masters requests, which in part caused them to sustain the very subprime-related losses they are now being downgraded for. Funny how that works, isn't it?

The Upshot

The upshot of all this is that the entire global professional investing world has traditionally heavily relied on these ratings outfits in making investment decisions. "AAA" ratings that used to be regarded as immovable, solid landmarks in the investment landscape now turn out to be nothing more than shape-shifting phantoms.

In fact Egan-Jones, which is a relatively new ratings agency that decided to follow the old model of getting investors to pay for their services, rates MBIA not "AA" (to where Moody's wants to downgrade it) but only a mere BB+, which is essentially junk status.

There is no telling how many other companies and bond-issuing governmental entities might be affected in a similar way. Quite tellingly, and in anticipation of potential future criticism, Moody's has recently warned that it may have to downgrade the United States of America's credit rating.

There are international efforts underway to "fix" the coming ratings disaster by making the companies adhere to "higher ethical standards. Yeah, right. That has always helped, hasn't it? Just think "Sarbanes-Oxley". The only thing that will fix the problem is to prohibit the ratings companies from accepting money from the institutions they rate. Period.

But, regardless of how, whether, and when the ratings companies themselves will get fixed, the neglect they have shown in the past has caused systemic problems. That malfeasance is opening up a veritable maelstrom, a black hole for international credit ratings. The collective reputation of these agencies has pumped up the value of many bank and government-issued debt instruments for the past three decades - and now that "value" is threatening to collapse.

The question now is: on how many - and on which ones - of these credit ratings did they goof up? Six years ago they failed to timely warn of Enron, Worldcom, and others. Now, it's Ambac and MBIA. Who's next?

The very fact that these agencies have been whitewashing their clients' credit ratings over the past several decades throws every single rating they have issued into doubt.

That means there are likely to be huge numbers of bone-deep ratings cuts coming down the pike - and nobody knows which ones, or how deep those cuts will be.

One thing, however, is almost for certain: The very fact that Moody's has warned of a credit downgrade for the United States indicates that such a downgrade is probably long overdue - and that will spook a whole lot of international US treasury investors - like China, India, Japan, and Saudi Arabia.

Let that sink in for a moment.

When companies and governments get downgraded like this, they must offer far higher returns on their debt paper to attract future investors - and that raises interest rates.

Considering how far these outfits may well appear to be behind the curve, that means the world is anticipating a humongous jump in long term and short term interest rates - and that in spite of the US Fed's desperate and frantic attempts to lower domestic borrowing costs.

Interest Rates Will Have to Rise

Unfortunately, as far as most government bonds are concerned, higher returns mean that a lot of bonds have to be sold because, with bonds, yields are an inverse function of price. For the yield to go up, the price must go down, and that means selling, selling, selling.

The astute investor will anticipate that - and get the hell out of bonds of any kind. And, oh yeah, as interest rates rise across the board, companies will find it more expensive to borrow money, so it gets harder to make profits (which is already pretty damn hard as it is these days) and that means stocks will suffer as well.

Where do you think all of that newly homeless investment capital will go? It will seek a safe haven - but bonds, especially those of the US government kind, will long since have lost that status by then, even in paper investors' minds.

That just about leaves only gold, its precious metallic cousins, and the related investment vehicles such as precious metals ETFs, stocks, and mutual funds with any hope of decent returns.

It will be very interesting to watch this happen: Millions of investors, institutional and private, all rushing to invest in only a handful of companies, while bidding down the price of fiat money.

 

Got gold?

Alex Wallenwein
Editor, Publisher
The EURO VS DOLLAR MONITOR

Copyright © 2008 Alex Wallenwein - All Rights Reserved

Alex holds a B.A. degree in Economics and a juris doctorate in Law. His forte is research. In late 1996, he began to research how money is used by some to exert political and economic control over others' lives. In the process, he discovered that gold (along with silver) is the common man's antidote to this effort. In writing and publishing the Euro vs Dollar Monitor, he explains the dynamics of this process and how individuals can harness the power of gold in their efforts to regain their political and financial autonomy.

Just like driving your car, investing only makes sense if you can see where you are going. The Euro vs Dollar Monitor is the golden windshield wiper that removes the media's greasy film of financial misinformation from your investment outlook. Don't drive your investment vehicle without it!

Alex Wallenwein Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

RICHARD DAVID GORDON
08 Feb 08, 05:51
Unregulated Financial Services

Yes Alex I find it most interesting that several prior FED staffers recently were radio interviewed and let it out that when the new rules were instituted to correct the inequities of the Enron, Worldcom,etc. offbooks debacle the one industry that was left exempt from the new rules is the FINANCIAL SERVICES INDUSTRY: a regulated industry at that. Let alone the unregulated Private Equity Funds or the Hedge Funds or Sovereign wealth Funds which are unregulated. Thus the trillions in CDOs and CDSs now rated AAA by both the monoline insurers and the ratings agencies are so toxic and non-transparent that this debacle is still in the beginning stages even though 1 or 2 trillion in worldwide Central Bank ( and FED ) monies have been infused into the system which incidently has had zero imput into stimulating the various national economies ( we here are still waiting on the President's signature to the Congressional Stimulous package ( bandaid ) But have merely staved off the inevitable result: the complete collapse of the Anglo-Dutch financial system we are so used to serving. Keep in mind the upsurge in the collective engagement of the Sovereign Wealth Funds and the realignment of the various petrodollar countries away from the dollar. Even Warren Buffet stated the the dollar is worthless. The establishment of the Bank of the South and the inclussion of the various SA countries should be a signal that the paper tiger american century has come to an end. And the alternative structure replacing it has it's foundations.


Chris Murdoch
07 Mar 08, 06:54
Credit Rating Agencies: Wrongful Actions

For your readers' possible interest, here are a few links to information exposing the deceitful actions of the international credit rating agencies:

http://www.globalsecuritieswatch.org/SEC_Conference_Brief.pdf

See also:

http://globalsecuritieswatch.org/Chris_Dodd_Letter_Final.pdf

The Big Three rating agencies knowingly continue to maintain demonstrably false ratings which are in flagrant violation of settled international law. Here is a link to an article which exposes the intentional and self-serving misapplication of published metrics and published criteria by the three largest credit rating agencies:

http://www.globalsecuritieswatch.org/world-news.pdf

And one more:

http://www.mywire.com/pubs/PRNewswire/2005/07/25/943034?&pbl=15

Best Regards,

Chris


Dominic
10 Mar 08, 04:21
Warren Buffet

Buffet said the Dollar would be worth less, not worthless.

Theres an all inmportant space in that sentance.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules