Many observers assign a large part of the blame for the 2008 financial crisis to the "big three" credit rating agencies, which gave their AAA seal of approval to worthless investments. Now those same agencies are helping to bring the euro zone to its knees -- and no one is trying to stop them, Spiegel Online reported.
Wherever things blow up in the financial world, the rating agencies' tracks can be found. The anonymous analysts of S&P, Moody's and Fitch (the smallest of the "big three") were center stage during the global crash. They also appear in the SEC fraud complaint against Goldman. And now they're causing financial havoc in Europe.
They're the éminences grises of Wall Street, phantoms and puppet masters. They wield enormous power over the fate of loans, deals, companies and even countries. Yet rarely has anyone ever really questioned their actions -- let alone held them accountable.
Their role, however, is far from unblemished. In the US, the rating agencies' behavior is now finally being called into question, albeit slowly. New York Times columnist and Nobel Prize-winning economist Paul Krugman accuses them of "a deeply corrupt system." US Senator Carl Levin, a Democrat, sees them as the main culprits in the credit crisis: "If any single event can be identified as the immediate trigger of the 2008 financial crisis, my vote would be for the mass downgrades starting in July 2007," he says. "Those mass downgrades hit the markets like a hammer."
These are the same companies which are now messing with Europe's financial present and future. This is how it works: The agencies set the credit ratings for companies, even entire countries, and assess the risk of their investment products. These range from simple bonds to complex constructs like the derivatives and collateralized debt obligations (CDOs) which formed the house of cards that collapsed during the 2008 financial crisis and which are also at the center of the current lawsuit against Goldman Sachs.
Despite this dubious track record, the agencies still carry a carte blanche: If they award their highest seal of approval -- an AAA rating -- it means it's safe for investors. Unfortunately, such a rating can also be a trap. An AAA rating snared the Goldman clients -- among them the German bank IKB -- who invested in "Abacus 2007-AC1."
Yet a reform of the system is not in sight. The Democrats' current proposals to further regulate the US financial industry contain little about the rating agencies, apart from a tepid appeal to "strengthen" their regulation. Read more.
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