Inside Financial Services

More Piercing Insights From Moody’s

News flash! The banking business has stabilized!

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It’s happened at last: the ratings agencies are now officially beyond parody. Yesterday, Moody’s finally got around to rousing itself from its intellectual torpor and upgraded its outlook for the banks to “Stable” from “Negative.”

Hey Moody’s, thanks for the heads up! You certainly aren’t out on a limb: since 2008, when Moody’s downgraded the group, the banking industry has seen loan delinquencies plummet across the board even as its capital ratios have doubled. What’s more, the largest banks have gone through four rounds government-mandated stress tests and, notwithstanding the higher capital requirements that followed, the industry as a whole earned a record $40 billion in the first quarter. And only now Moody’s is getting around to informing the world that industry’s outlook has improved enough to warrant an upgrade-and just to “Stable”? What in the world would have to happen for Moody’s to consider the banks’ outlook to actually be improving?

All this would be merely pathetic but for the real damage the rating agencies can do. Recall that in the midst of the panic in 2008, when the financial system was on the verge of a total nervous breakdown, Moody’s and the other agencies saw fit to poured fuel on the fire with their similarly poorly timed announcements that the outlook for the banks was suddenly “Negative.” Everyone already knew that, of course, but in those days every piece of bad macro news-even “news” that was blitheringly obvious-added to the momentum of the downward spiral. Moody’s sure didn’t do anybody any favors (or add any new insights) with its ham-handed downgrade in the midst of the crisis, just as it’s not adding any value with its upgrade of the group now.

Why do we even need rating agencies anymore? Back at the start of the last century when the agencies were founded, access to reliable company financials was extremely limited, so they arguably provided a real service. Now, though, fixed-income investors have all the information they need to size up securities for themselves. I believe the agencies are useless-or rather, as we all saw at the bottom of the last cycle, they’re worse than useless.

What do you think? Let me know!

5 Responses to “More Piercing Insights From Moody’s”

  1. Mark

    Funny, I never considered it but the ratings agencies have become the ultimate trailing indicator!

  2. DSB

    Must be time to lift the suspension of Mark to Market accounting …

  3. Ralph

    Remember, it wasn’t until the 1960′s that banks were allowed to issue debt securities. And at that time Moody’s took the position that it would not rate debt securities of banking institutions. They felt that if they rated one bank Aaa and another bank Baa depositors would move to the higher rated institution. Ralph

  4. pmulqueeney

    Tom, Great article! I agree wholeheartedly! Another argument for ridding the markets of rating agencies
    is the recent downgrade of Berkshire Hathaway by S and P. If these folks are so important let them
    compete against one another based upon their expertise and performance not regulatory mandate! Thanks,
    again for your article. PMM

  5. Anonymous

    I hate it when I have to agree with you 100%.

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