Tuesday, September 16, 2008

Lowering Credit Rating After A Company Fails

So apparently, credit rating agencies Moody's and Standard & Poor today cut the rating of insurer AIG, who appears to be the next financial company to fail. They did that the day after the company's shares fell more than 60%. Similarly, after Lehman Brothers declared bankruptcy, they lowered the credit rating of that company from A2 (very high) to junk status. Isn't that a bit too late given the fact that investors have already lost the money? And what does it say about the value of their ratings when companies hold a A2 rating on the moment they go bankrupt?

They sound sort of like fictional investment banker George Parr who when confronted with the fact that they despite their million pounds salaries didn't foresee the banking crisis in the strictest sense of the word, or in any sense of the word, replied that they did notice it when it happened.


Blogger Wille said...

I've been arguing for some years that credit ratings need an overhaul (most recently, it was my turn-of-the-year prediction no 4 of trends to watch), as they rarely reflect the reality of things, most notably the actual ability to repay debt.

Case in point: for personal credit ratings, it is better to have a credit line of $200000 and use $100000 of it, than have a credit line of just $2000 and use $1500 of it. Doesn't really matter if in the first instance you don't have an income to ever pay it back, and in the second instance you can pay the amount back in full anytime you wish to do so, the thing that matters is size of potential credit line and percentage of credit used.

3:02 PM  

Post a Comment

<< Home