Friday, 19 December 2008

11 pointless downgrades

Today’s S&P bank downgrades look about two years too late to me. Since the share price of a typical bank is down around 90 percent relative to August 2007, it is not clear what additional information these downgrades offer to potential investors.

"Eleven of the world’s biggest banks were downgraded Friday by Standard & Poor’s after the ratings agency said the current downturn could be longer and deeper than previously thought. Six major US banks were downgraded, including JPMorgan Chase, Bank of America and Wells Fargo, as well as five banks in Europe.

The agency cut its ratings on Citigroup, Morgan Stanley and Goldman Sachs by two notches each. In Europe, S&P shaved one notch off the ratings of Barclays, Credit Suisse, Deutsche Bank, Royal Bank of Scotland and UBS.

While the downgrades were driven in part by the worsening economic climate in the US and abroad, S&P noted specific causes for concern at each institution in spite of recent government intervention to rescue the sector."


Anonymous said...

I think the downgrades are relevant... since an institution that is not AAA rated can't issue AAA rated paper. This would bring into question the ability of banks to access the facilities offered by the central bank.

Anonymous said...

It also has an effect on the CDS space and amount of collateral they need to post when trading.

The sooner these rating agencies are put out of business the better.

Anonymous said...

If you put the rating agencies out of business, who then will take their place? Govt-owned agencies?

Nick von Mises said...

No. Private research companies. There's already one new rating agency (paid by the buy-side) that got given regualtory approval.

As an anecdote, our global CEO recently did a town hall. When asked from the floor "what have we learned" he answered "never ever trust a rating agency".

The market will adjust, if it's allowed to. Oh, this guy heads a "too big to fail" bank.

Anonymous said...

But fundamentally what is the point of ratings agencies, we have a perfectly transparent system for discovery default risk - it is called a credit default swap.

What you have with ratings agencies now is the worst of both worlds, a government mandated oligarchy made up of for-profit companies.