Bill Gross, who manages Pacific Investment Management [PIMCO], the world’s biggest bond fund with assets under management of some $220 billion, believes that credit rating agencies are no useful anymore.
The big three rating agencies, McGraw-Hill’s (MHP) S&P, Moody’s (MCO) and Fitch “no longer serve a valid purpose for investment companies free of regulatory mandates,” Gross wrote in a May Investment Outlook on the company’s Web site.
According to Gross, these agencies not only don’t have a monopoly on investment or ratings expertise, but they can be timid and slow when it comes to downgrading sovereign debt.
Pimco: “Firms such as PIMCO with large credit staffs of their own can bypass, anticipate and front run all three, benefiting from their timidity and lack of common sense,” Gross wrote. “Take these recent examples for instance: S&P just this past week downgraded Spain “one notch” to AA from AA+, cautioning that they could face another downgrade if they weren’t careful. Oooh – so tough! And believe it or not, Moody’s and Fitch still have them as AAAs. Here’s a country with 20% unemployment, a recent current account deficit of 10%, that has defaulted 13 times in the past two centuries, whose bonds are already trading at Baa levels, and whose fate is increasingly dependent on the kindness of the EU and IMF to bail them out. Some AAA!”
Gross also notes in his analysis that these agencies “were more than tardy when it came to [sound the alarm on] the Enrons and the Worldcoms of 10 years past, and most recently their blind faith in sovereign solvency has led to egregious excess in Greece and their southern neighbors.”
Can’t disagree with Bill’s line of thinking on the subject. After so many consecutive failures, the question is: why do we still listen to the rating agencies?! To quote Michael Lewis, our greatest financial journalist, in his book, The Big Short, the folks at Moody’s and S&P, “appeared to know enough to justify their jobs, and nothing more.”