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Didn't S&P maintain that Lehman Brothers had a favorable rating up until they collapsed? And in the subsequent congressional hearings the rating agencies simply

Didn't S&P maintain that Lehman Brothers had a favorable rating up until they collapsed? And in the subsequent congressional hearings the rating agencies simply responded that the rating is their opinion. Why do people put so much faith in these ratings when they have proven to be not very useful in evaluating the risk associated with investing in an institution?

thematt 15y ago
People put faith in them because not everyone can hire an army of experts to evaluate all possible investments. S&P supplies their ratings to life insurance companies, pensions funds and even municipal governments. These entities don't have the resources to employ that expertise in-house, so they rely on companies like S&P and Moody's to give them guidance.
- grourk 15y ago
  S&P and Moody's don't exactly employ an "army of experts" either. It's a few analysts making a rather subjective judgment and voting. (Literally, a few). And the investors who are actually buying US debt don't rely on ratings agencies to give them guidance, and do in fact have expertise in-house to evaluate these things. As has been mentioned elsewhere on this thread, institutional investors don't treat US bonds like any other, subject to triggers and rules like AAA-only. It's an exceptional case that is treated differently than the others, and one rating agency's opinion is not going to make as big an impact as people seem to think. It comes down to this: where else would they put their money?
- giardini 15y ago
  thematt says "so they rely on companies like S&P and Moody's to give them guidance." And those companies fabricate data and sell it to them. Perhaps not everyone should invest in areas where they have no possibility of understanding the risks.
  - nazgulnarsil 15y ago
    "Perhaps not everyone should invest in areas where they have no possibility of understanding the risks." You just managed to sum up the vast majority of economics problems. Humans are dumb though. Not much you can do.
- adulau 15y ago
  The interesting part is who is paying the credit rating companies... usually, it's the emitter of the bonds[1]. The emitter can be a state, a local region or some other organization. The emission of the bound is quite often managed by a financial organization. So the interface between the bond, the credit rating company and the state is "a financial organization". Of course, they don't have any conflicting roles in working in the field... [1] http://en.wikipedia.org/wiki/Credit_rating_agencies#CRA_business_models http://en.wikipedia.org/wiki/Credit_rating_agencies#CRA_busi...
winestock 15y ago
You have a point, but the downgrading has symbolic value. Don't denigrate that symbolic value, either. Confucius say: "Signs and symbols rule the world, not words or laws." As another comment on this thread pointed out, if the sole maker of the world reserve currency cannot keep a AAA rating, then who really deserves it? As the recent budget fight showed, the US government cannot make more than token attempts to improve its finances. The current debt is about one-fifth of the annual world GDP. Well-nigh invincible power blocs guard the biggest line-items on the budget. Tax increases are off the table and of doubtful effectiveness in this economy even if they were passed. What confidence should such a government inspire?
- mdda 15y ago
  You're making the assumption that the dollar remains the world reserve currency. Now there's a huge additional argument for moving to a trade-weighted basket of currencies. Besides, there are EUR issuers that are still AAA.

thematt 15y ago

People put faith in them because not everyone can hire an army of experts to evaluate all possible investments. S&P supplies their ratings to life insurance companies, pensions funds and even municipal governments. These entities don't have the resources to employ that expertise in-house, so they rely on companies like S&P and Moody's to give them guidance.

grourk 15y ago
S&P and Moody's don't exactly employ an "army of experts" either. It's a few analysts making a rather subjective judgment and voting. (Literally, a few). And the investors who are actually buying US debt don't rely on ratings agencies to give them guidance, and do in fact have expertise in-house to evaluate these things. As has been mentioned elsewhere on this thread, institutional investors don't treat US bonds like any other, subject to triggers and rules like AAA-only. It's an exceptional case that is treated differently than the others, and one rating agency's opinion is not going to make as big an impact as people seem to think. It comes down to this: where else would they put their money?
giardini 15y ago
thematt says "so they rely on companies like S&P and Moody's to give them guidance." And those companies fabricate data and sell it to them. Perhaps not everyone should invest in areas where they have no possibility of understanding the risks.
- nazgulnarsil 15y ago
  "Perhaps not everyone should invest in areas where they have no possibility of understanding the risks." You just managed to sum up the vast majority of economics problems. Humans are dumb though. Not much you can do.
adulau 15y ago
The interesting part is who is paying the credit rating companies... usually, it's the emitter of the bonds[1]. The emitter can be a state, a local region or some other organization. The emission of the bound is quite often managed by a financial organization. So the interface between the bond, the credit rating company and the state is "a financial organization". Of course, they don't have any conflicting roles in working in the field... [1] http://en.wikipedia.org/wiki/Credit_rating_agencies#CRA_business_models http://en.wikipedia.org/wiki/Credit_rating_agencies#CRA_busi...

winestock 15y ago

You have a point, but the downgrading has symbolic value. Don't denigrate that symbolic value, either. Confucius say: "Signs and symbols rule the world, not words or laws." As another comment on this thread pointed out, if the sole maker of the world reserve currency cannot keep a AAA rating, then who really deserves it? As the recent budget fight showed, the US government cannot make more than token attempts to improve its finances. The current debt is about one-fifth of the annual world GDP. Well-nigh invincible power blocs guard the biggest line-items on the budget. Tax increases are off the table and of doubtful effectiveness in this economy even if they were passed. What confidence should such a government inspire?

mdda 15y ago
You're making the assumption that the dollar remains the world reserve currency. Now there's a huge additional argument for moving to a trade-weighted basket of currencies. Besides, there are EUR issuers that are still AAA.