Is it Time to Stop Listening to the Ratings Agencies?

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Moody’s CEO Ray McDaniel (right) testifying about the Financial Crisis, along with Warren Buffett (Shannon Stapleton/REUTERS)

It’s not often that I burst out laughing when I open up the business section, but I couldn’t help myself after cracking the Times to a see a big cartoon and the scarifying story that Moody’s and Standard and Poor’s were thinking about downgrading the AAA credit rating on US debt. The ratings agencies were making noises about the ballooning levels of debt–heading past $15 trillion–suggesting that the Congress needs to get serious about cutting it. The Times rounded up the usual suspect in debt stories, Pete Peterson, whose foundation is on a mission to tamp down our borrowing habits, and Pete conjured his usual sensible quote.

But others see the mounting national debt as a potential danger. What once seemed unthinkable — that one day the United States government would no longer be accorded the highest credit rating — is now not only thinkable, but increasingly probable.

“I am concerned about the unsustainability of our long-term situation,” said Peter G. Peterson, a co-founder of the Blackstone Group and a prominent deficit critic.

But nobody asked this: Why is anyone paying any attention to Moody’s or S&P?

These are the same agencies that were applying the AAA stamp to subprime mortgage-backed CDOs like they would Cheese Whiz  to crackers. And when the economy gagged on all this junk the ratings agencies defended their work, even as they were rapidly downgrading everything. When investors eventually sued, essentially alleging they’d been sold misguided securities, the agencies fallback defense was to say that AAA is not so much a rating as a mere opinion. You can’t sue us because of our opinion, say the agencies. In my opinion, we shouldn’t even be taking Moody’s and S&P seriously. These are the people who helped make the financial meltdown possible. What, exactly, do they know?

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