S&P and Moodys - Death of Bond Rating Agencies

In all the carnage of 2008 - the bankrupted companies, the government bailouts, the mortgage foreclosures, the ratings agencies have been consistently behind the ball regarding reacting to the changing financial landscape. Moreover - the analyses of the companies these bond rating agencies conducted will likely show that they too were asleep at the switch as this crisis emerged. Current credit watches are just prime examples.

Today's headline from Bloomberg details the fewer than a dozen companies left worldwide who still hold the coveted Aaa rating. GE has been in the spotlight lately because it has desperately tried to hold on to its Aaa rating - a grade it has held since the 1950's - amid worry about its huge financial services arm. The implication being that the borrowing costs of their future debt issuances will escalate if they are downgraded even one level costing them about 1.1% more than if the were to keep the Aaa rating.

The crazy thing about the Aaa rating or lack thereof - is that it should be largely irrelevent at this point. The stock market has put its own downgrade on many of these Aaa companies far sooner than S&P or Moody's - making the sudden wash of downgrades and negative credit watches seem tongue and cheek.

Furthermore, the notion that a company could issue some debt today while it still had a Aaa rating and save 1% in interest over the same debt issued the day after a downgrade is ridiculous. There is too much being put on the difference in borrowing costs, but it shouldn't have anything to do with the rubber stamp of S&P, so much as the health of the overall credit market. Case in point - GE's borrowing costs have been rising all year, so what did the Aaa have to do with it?

The fact is - nothing. Bond ratings are dinosaurs of a by-gone era where access to financial information was not easy to come by and markets less fluid in pricing in information. All the ratings agencies now are is trumped up analysts and cheerleaders of companies cheering or booing after the play has already happened. In this way, their ratings changes are like Monday-morning quarterbacking companies financial position. Their stamps of approval have probably led to unfortunate ill-guided and researched investment positions which are now being brought to light not by the ratings agencies, but by the rest of the information available all year long.

Though ratings are needed in some form because they allow companies to be evaluated generally, their ratings serve more for eye-pleasing cursory ratings - and their changes are too static. What would be of better value would be daily updated composite indicators which compare companies on a variety of factors - this is in fact what the open market for debt issuance does - it would be more helpful to see the results of this in a consolidated form and would likely treat every company more fairly than the discreet bond ratings levels currently being used.