Ratings Agencies: How to Say You’re Safe and Sound with Zero Credibility

New York Life is just one of the financial institutions continuing to see value in ratings agencies like Moody’s, S&P and Fitch. New York Life continues to tout their triple-A rating as an indicator of their safety and soundness.

Reality Check: A good rating was once viewed as a badge of honor. Not anymore.

A glowing rating from Moody’s or S&P is anything but a “stamp of good health” these days. For some people, it has the opposite effect. It says, “We shovel out big bucks to total fraudsters who will gladly give us whatever grade we paid for.”

“A deal could be structured by cows and we’d rate it.”

Remember that little gem? It was a text message sent from an employee at one of the large ratings agencies, and last fall it became a symbol for their gross negligence in evaluating mortgage backed securities.

Key Question: How can ratings agencies be trusted when they failed so miserably at their purported “core competency?”

Rating agencies today have zero credibility. The only reason that they aren’t out of business is that the commercial paper market has no substitute for them (yet). But anyone smart enough to know who Moody’s or S&P is knows they are a joke. They come along and drop a firm’s rating months after its share price plummets, or after the firm announces it’s on the brink of bankruptcy. They are always late to the party. They don’t do anything more than tell the market what it already knows.

Bottom Line: Financial institutions need to look from within to find proof that they are safe and sound. Paying a third party to tell you — and your audience — “we’re okay” is a concept outmoded by the economic crisis, and simply isn’t worth the money. If you want to say you’re safe and sound, you’ve got to drum up real proof, not the hollow claims of some shill. You need to start talking about capital ratios, default rates and loan loss provisions. People may not understand all that stuff, but at least it’s real, credible and tangible.

[ratings]

This article was originally published on . All content © 2019 by The Financial Brand and may not be reproduced by any means without permission.

shares