ON SLIP-SLIDING AWAY

NOW THEY TELL US

It's fascinating to watch the ratings agencies be so vigilant on the way down for banks when they seemed to be so care-free on the way up.  The WSJ reports:

Credit-quality watchman Standard & Poor's slashed the credit ratings of 11 global banks Friday, but the moves were largely ignored by the bond market, which has begun to look positively on the governments' efforts to save these institutions.

The agency reduced the debt ratings [7D1 -]on Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., Morgan Stanley, Wells Fargo & Co., J.P. Morgan Chase & Co., and on European banks Barclays PLC, UBS AG, Credit Suisse Group, Royal Bank of Scotland Group PLC and Deutsche Bank AG.

S&P left HSBC Holdings PLC's rating pat, but gave the bank a negative outlook. The agency also warned that investors in the hybrid debt offerings sold by several banks may find their payouts cut if the economy and the financial markets remain tumultuous.

While the bond market is taking these ratings cuts in strides, the stock market remains a bit more apprehensive, judging from the moderate weakness in bank stocks following the news. 

But both markets are of course taking a lot of comfort from the government's commitment to be there for liquidity and inexpensive funding.  Let's see how long that lasts.

Comments

[Alex Tolley]

While I think the rating agencies failed, I take a contrarian view that it is not all their fault in this case, especially with banks.

There is almost no way they could understand the MBS instruments better than the banks themselves, who clearly didn't understand them (or knew enough to hid the more toxic parts "off balance sheet"). We saw a similar problem in the crash of 1987 when portfolio insurance failed to work as advertised and compounded the decline in prices. Like MBS's today, their volume impacted the market directly, something that could not have been easily predicted quantitatively.

Furthermore, their own ratings will impact the future ratings of the banks, because as the ratings decline, this will instill more counterparty fear incurring deeper fears and credit contraction.

So while I think there is some merit to the idea that other forces that resulted in over optimistic ratings of banks prior to the meltdown, for the most part the agencies are not to blame for ratings situation, nor is the current lowering of ratings unexpected.