Booming Bonds Boost the Rating Agencies' Fortunes, but Not Their Reputations
On Thursday, Moody's reported fourth-quarter income of $101.9 million, or 42 cents a share, which came in a penny ahead of analyst expectations. Its shares, however, were off 5% after its forecasts came in short. S&P owner McGraw-Hill earlier reported earnings of 51 cents a share -- far ahead of the 40 cents Wall Street was expecting. One reason for the profit surge: Revenue at its credit markets services group grew by 19%.
Unlikely Combination of Events
But while more bread-and-butter ratings for corporate bonds have staged a comeback and calls for the agencies' demise by high-profile hedge fund managers like David Einhorn of Greenlight Capital (who was prescient in anticipating the collapse of Lehman Brothers and took a short position in Moody's in September) have not come to fruition, investors should take the results with a grain of salt.
For starters, the rush to issue debt followed the post-Lehman nuclear winter in the credit markets that's not likely to be repeated. Indeed, bond sales by companies outside the financial sector dropped 7% in January as looming concerns about sovereign debt made investors jittery and hammered the stock market as well.
The once-booming securitization business, meanwhile, remains moribund and shows no signs of returning to its past glory any time soon. Just $135 billion in asset-backed securities will be issued this year, not much more than the record low $125 billion issued in 2008 according to Barclay's Capital.
And while the agencies may have dodged a bullet in last month when a $100 billion lawsuit by investors accusing the credit raters of fraud was dismissed, lawmakers are currently working on regulation to make the agencies more accountable.
Although they're still standing, ratings agencies did irreparable damage to their credibility by sanitizing bad debt with high ratings during the credit bubble. Investors are unlikely to forget those disastrous decisions any time soon.
"Come to think of it, many of the spectacular failures during the crisis bore AAA ratings," Einhorn wrote in September, citing government-sponsored enterprises (Fannie Mae and Freddy Mac), insurers like AIG and companies like General Electric. "Investors who bought AAA-rated structured products thought they were buying safety, but instead bought disaster."
The consequences of those damaged reputation will linger even after the thaw in the once-frozen credit markets has passed.