Business - Do ratings matter?

Ratings have seldom shown themselves to be forward indicators of problems, raising legitimate questions of their usefulness.

One wonders how rating agencies make their judgements which can make or break the mightiest of them – both companies and countries - in a matter of moments.

And one wonders even more how they retain any credibility at all when their ratings have been extremely off the mark in difficult times – the times when the ratings matter most.

Before its spectacular collapse last year, the Standard & Poor’s, or S&P, rating on US insurer AIG International was higher than that of many countries, including Malaysia, at AA+, just one step below the best sovereign rating of AAA, accorded to countries such as the United States.

S&P is the largest rating agency in the world. It gives Malaysia a relatively lowly rating of just A+ (reminds me of the highest possible grade those days that a lot of us aspired to in primary school but few got) under a system which gave the highest triple-A or AAA grade to the most secure debt, descending in steps to AA+, AA, A+, etc write down to D to denote a borrower in major default.

But that AA+ did not prevent AIG’s dramatic fall from grace in a pall of shame when, like almost everybody else, it came to pass that it was also exposed to the subprime credit crisis and very substantially at that.

What it did was to guarantee subprime credit for a fee which increased fee income and which it was able to do because of its high credit rating, thanks to the wonderful people at S&P who thought so highly of AIG.

But the question is, how come the credit rating agencies did not pick this up when the books and officials of AIG were open to them? Did they not understand that AIG had exposed itself to great risks by these guarantees or were they glibly and blissfully unaware?

As they say ignorance is bliss, until the bliss was shattered by reality that is. The share price of this venerable global institution skittered down to a tenth of its value and no less than the US government had to pump in tens of billions of dollars to save the day.

Since that day in September last year, much water has flowed under the bridge along with newly discovered losses at a number of banks, financial institutions and other companies, all of which have lined up begging bowl in hand at the doors of the seemingly overflowing and bottomless coffers of the US treasury.

The General Motors official who flew in a private jet from Detroit to join the queue in Washington, was suitably chastised by the press the following day. The United States has to shell out a few trillion US dollars to keep more venerable names in business.

Through my simple mind a lot of complex questions are raging like a freight train barrelling along the tracks out of control. But apparently not at S&P.

Where is the US going to get the money? Will the foreign countries, which have put their funds inside the US, pull out? If the US prints money to pay its obligations, the bulk of it luckily in US dollars, won’t inflation spiral high and out of control nevertheless, plunging the value of the US dollar?

That’s bad news, right? The US’s creditworthiness must be shot to bits, right? No, wrong according to S&P and the other people who know enough about credit to rate whether others are worthy or not but whose assessment is becoming increasingly incredible and worthless.

According to S&P, the US’s rating, despite all the myriad troubles it faces, still stands at AAA, the best possible.

Perhaps the UK or Australia or New Zealand, all of which have serious problems, have lower ratings? No, they are all triple A, just like the US. And so are Germany and Japan.

And since the creditworthiness of the entire developed world has not changed one single jot – not a single teeny-weeny downgrade despite all those troubles – all’s well with the world, right? But, unfortunately, we all know that is not true.

Mystery: How is it possible for the developed world to be in major, unprecedented financial and economic mess and for the credit ratings of these countries to be not affected at all?

What about those countries with the highest reserves and perhaps the best balance sheets? China is a mere A+, same as Malaysia. South Korea is just one grade up at AA. And what do you know, Israel, in a constant state of war and surrounded by hostile neighbours who will snuff it off if given half a chance, is at AA, higher than Malaysia or China.

Oh, perhaps there’s some credit rating agency out there which may have something more real to say. Yes, there it is! Moody’s says the US is at risk of losing its triple A rating but within a decade – how insightful and forward-looking.

Just a little footnote: Moody’s has not altered its triple A rating on the US since 1917 when it first initiated ratings – now that’s dynamism for you.