Credit Ratings Agencies are Now the Angel of Death

I have to agree with Jeff Macke when he says that the ratings agencies need to have some sort of suspension in order to stabilize markets.

What Moody's and S&P did last night and this morning illustrates, to me, the futility of Fed actions to date. By noticing the glaring and obvious long-standing problems of General Motors and Ford (F) last night, S&P effectively raised GM and F's cost of capital infinitely. GM is in the middle of a "capital raise." It was going to be expensive before S&P raised the price of GM paper.

Now, after S&P's downgrade threat, it's going to be impossible.GM is dead, in my view. It may have died anyway but it's almost certainly dead now. S&P killed them.

I wouldn't go that far to say that GM is dead because I think they might be too important to politicians in the swing states to just fall into bankruptcy that easily. There will be an auto industry bailout before too long simply because the main street impact of thousands of blue color union jobs disappearing in favor of foreign companies is just too painful for the Dems.

The problem that Macke sites though is 100% correct. These ratings agencies have the power to kill any company in America simply by threatening to downgrade their credit. They don't actually have to downgrade anything they just have to put them on a watch-list for a firm to fail. That is just too much power for just a couple of companies to hold over trillions of dollars in equities and debt.

The worst part is that they are one of the people that got us into this mess in the first place. They were the ones that made subprime loans packaged together have the same debt rating as rock-solid Treasuries. So all sorts of firms had the green light to buy what these ratings agencies deemed "riskless." It is just like the USDA rating spoiled meat as Grade A.

These agencies did this basically to drive their own stock price up and increase their revenues because rating exotic subprime mortgage backed securities had higher fees then vanilla debt. Their greed has cost Americans billions of dollars and forced a total reordering of the financial world. The heads of these companies need to be the ones being investigated on Capital Hill and not guys like Lehman's Richard Fuld.

The worst part about it is that workers at S&P and Moody's could potentially be bribed by short sellers looking to make a profit. It probably hasn't happened but I could see a few unscrupulous short sellers throw a few thousand dollars at some underpaid credit bean counter and make billions riding GM or Lehman into the dust.

That is why there needs to be a federal investigation into these companies and maybe even a government takeover of them if there was chicanery involved. Ever since I was researching Ambac at the beginning of the year I was wondering how a for-profit company can rate these things and still stay 100% objective.

I kept thinking that this work should be done by a subsidiary of the Fed or the Treasury department with tons of oversight and transparency instead of a company thats sole existence is there to rate things for a fee.