Have credit rating agencies become irrelevant?
For example, GE's AAA rating clearly means nothing to investors who bid credit default swaps on the company's bonds up to a price of 500 to 700 basis points! Remember, triple-A means creditworthiness on a par with that of the U.S. Treasury, and credit default swaps on Treasury bonds have never traded above 35 basis points.
If investors no longer trust credit rating agencies, what does that mean for the future?
Answers
419 points
TeachMeMore answered one year ago …
I couldn't agree more, I think these agencies are forever tainted after this sub-prime debacle. What is really boils down to is a tremendous conflict of interest between the ratings agencies and the corporations they're supposed to objectively rate. How in the world can they be objective if they're being paid by the companies they're supposed to be rating? Seems like they'd lose a lot of business if they started to write overly negative (read: truthful) ratings.
We need something new here but I'm not quite sure what that would look like. For me, personally, I'd dig deeply into the company's financials (as it seems you would as well), but not many people know how to do that.
2222 points
readytoretire answered 11 months ago …
It means that the credit rating agencies will have trouble earning as much money in the future since their rating is no longer taken as a firm basis for decision making. The credit rating agencies are like the big stock raters, a additional signal, but not a leading indicator, or even current. Like the stock raters that downgrade a stock after it has lost 25% of its value. Credit ratings can be self fullfilling, if they downgrade someone, that company finds it harder to raise money and so is worth less, hence justifing the rating.
Read more from readytoretire
