The ratings agencies have mostly escaped public furor relating to the financial crisis, but that may be about to change.
PIMCO founder Bill Gross has taken to his firm's monthly newsletter to berate the agencies and question their usefulness. He's hardly alone.
Reforming the credit-ratings business is part of the financial regulation overhaul bill in front of Congress. And two New York University professors call for creating a ratings clearinghouse that would assign ratings jobs randomly.
In 2007, Gross wrote (perhaps crassly) about the agencies' role in the credit crunch: "Many of these good-looking girls are not high-class assets worth 100 cents on the dollar. You were wooed, Mr. Moody's and Mr. Poor's, by the makeup, those six-inch hooker heels and a 'tramp stamp.'"
He recently expanded on that sentiment, contending that such a description doesn't even begin to get at how nonsensical investment decisions were over the course of the past several years. "Their warnings were more than tardy when it came to the Enrons and the Worldcoms of ten years past, and most recently their blind faith in sovereign solvency has led to egregious excess in Greece and their southern neighbours. The result has been the foisting of AAA ratings on an unsuspecting (and ignorant) investment public who bought the rating service Kool-Aid that housing prices could never really go down or that countries don't go bankrupt."
Gross acknowledges that the pedestal on which the agencies have been placed means that dethroning them will be difficult. After all, the U.S. Securities and Exchange Commission itself designated them as "Nationally Recognized Statistical Ratings Organizations" in 1975. As a result, their tea-leaves readings have been considered sacrosanct for 35 years -- a difficult phenomenon to dislodge. Still, Gross urges investors to consider carefully before automatically assuming the ratings agencies are correct.
Write to Julie Steinberg