give Moodys, S&P, & Fitch a break...

[sniglet]

Everyone seems to be dumping on the ratings agencies these days. If it isn't for using overly optimistic assumptions when rating CDOs, it's for failing to switfly downgrade the monoline insurers (i.e. Ambac, MBIA).

However, these ratings firms really don't have much choice in determining how to better handle the crisis. We can gripe all we want about how they shouldn't have bought into the malarky of the credit bubble, expecting appreciation assets (and low defaults) to last forever. But all that is water under the bridge. For the here and now, the agencies are doing the best job possible in an attempt to pick up the pieces.

Sure, it's true that the ratings firms are constantly behind the ball, playing catch-up, only downgrading securities and firms long after the markets have already began treating them as junk. But, like I said earlier, the ratings firms don't have much choice.

If Moodys were to come out and issue MASSIVE downgrades tomorrow, reducing ALL the monolines and CDOs to junk, there would be a complete catastrophe in the financial system as write-downs cascaded throughout the system. Worse, Moodys would have opened them up to masses of lawsuits from irate investors and institutions would would wonder why they could go from AAA to junk overnight.

Worse, the very people who the ratings firms rely on the most for revenue (i.e. the financial institutions) would be so livid with them that they would never use them again to rate another security, finding some other alternative.

In short, massive downgrades would lead to immediate financial ruin for the ratings agencies.

So, if the choice is to issue masses of downgrades tonight, and lock the doors for good tomorrow, then it is an easy decision to try and drag things out as LONG as possible. Hey, the markets might recover. There might be a government bail-out. Who knows? But staying in business for another month, even if on life-support, is vastly preferable to giving everyone pink slips today.