A recent item by the Associated Press out of Washington, D.C., quoted the New York Times as reporting that the US Department of Justice was now investigating whether the Standard & Poor’s credit ratings agency “improperly rated dozens of mortgage securities in the years leading up to the financial crisis.”
The Times also reported that the investigation began before Standard & Poor’s or S&P cut the United States’s AAA credit rating this month, which reportedly prompted a number of US government officials to question the agency’s “secretive process, its credibility and the competence of its analysts, claiming to have found an error in its debt calculations.”
In particular, the justice department was reportedly looking into “instances in which the company’s analysts wanted to award lower ratings on mortgage bonds but may have been overruled by other S&P business managers.”
This was after S&P and other ratings agencies “reaped record profits as they bestowed their highest ratings on bundles of troubled mortgage loans, which made the mortgages appear less risky and thus more valuable. They failed to anticipate the deterioration that would come in the housing market and devastate the financial system.”
The Times also noted that “companies and some countries—but not the United States—pay the credit-
ratings agencies to receive a rating, the financial market’s version of a seal of approval. Before the financial crisis, banks shopped around to make sure rating agencies would award favorable ratings before agreeing to work with them. These banks paid as much as $100,000 for ratings on mortgage-bond deals, according to the Financial Crisis Inquiry Commission.”
One can only hope that the ongoing investigation can clearly establish whether there was wrongdoing on the part of S&P. There is a larger implication, of course, and that is whether ratings agencies can still be trusted relative to their comments on sovereign debt. In the case of the US, for instance, while S&P had downgraded its debt rating, Fitch Ratings on the other hand said it would keep US debt at the highest grade, AAA, with a “stable”—it expects the rating to stay there.
Moody’s also listed US debt at AAA but with a “negative” outlook, while S&P rated down the US for the first time to the second-highest grade, AA-plus. It is unclear, however, whether the S&P downgrade was an effect of the US justice department probe. One thing for sure, though, with the ongoing probe, ratings agencies’ reputations are at risk.
In November 2010, four months into the Aquino administration, Bloomberg reported that the Philippines’ debt rating was raised to the highest level in more than seven years by S&P, to BB (still below investment grade) from BB-, thus spurring gains in the peso and government bonds. It was the first upgrade for the Philippines since 1997, said Bloomberg, and brings the measure to the second-highest non-investment grade (or highest speculative grade), the same as Indonesia and Vietnam.
“We have upgraded the Philippines based on its steadily improving external liquidity profile and underlying strengths of its external accounts,” S&P said. “The upgrade also reflects the progress achieved in debt reduction and the underlying fiscal consolidation.”
And then late last month, July, just as the Aquino government celebrated its first year in office, S&P reportedly “affirmed the Philippines’ credit ratings, with a stable outlook, as upside and downside risks remain balanced,” noting that the country was “less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions.”
A news report quoted an S&P statement by credit analyst Agost Benard as saying that S&P, likewise, retained its recovery rating of “3” on the Philippines, “which denotes our expectation of 50 percent to 70 percent recovery in the event of a distressed debt exchange or payment default.”
In June Fitch Ratings did a similar thing and upgraded the country to BB+ from BB, one level shy of the investment grade. In the same month, Moody’s Investors Service also changed the Philippines’ ratings to Ba2 from Ba3, two notches below investment.
But while there was a preponderance of good news that could have prompted the ratings upgrade, and given that it is highly doubtful if the Philippine government will “pay” for a ratings revision, the US justice department investigation still prompts the question: to what extent can the ratings agencies be trusted?
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