Can we trust the credit rating agencies?

By Siziphiwe Ngxabi

The recession, as you already know, was caused by reckless lending. Lending by American banks to so-called “Ninja” customers (no income, no job or assets). Perhaps they thought it was the right thing to do at the time because the interest rates were relatively low. But as can be expected — the nature of economics — the interest rates went up. The Ninjas started defaulting and the economic environment changed rapidly.

After these bonds were issued, the banks sold them to investors as mortgage-backed securities (MBS). This is the problem. Bankers made a lot of money out of these securities because the housing market was growing rapidly and investor confidence grew because they were hoping the value of the mortgages would appreciate — delivering higher profits.

The value of these securities, as they were transferred from one investor to another, increased, mainly because they were naturally such risky securities, promising large returns on investment. This is a classic example of how the greed of a few can affect the survival of the rest. As the saying goes, when America sneezes the rest of the world catches a cold.

In order to equate the value of these securities, credit rating agencies such as Standard & Poor’s and Moody’s played an important role in misleading investors and the market.

Can we trust these agencies which contributed to bringing the global economy to a standstill? Some banks closed their doors as a result such as the Lehman Brothers. And Goldman Sachs appeared before a US regulator, the Securities and Exchange Commission, to account for its actions. Were the rating agencies brought to book?

Standard and Poor’s Southern Africa recently made a statement about the possible impact of the public-sector strike on SA’s rating. They based their argument on the threat that the government might have to resort to borrowing in order to meet the needs of the ever-growing wages expenditure. The sub-prime crisis emerged in 2007, three years later, can we still trust the judgement of these rating agencies?

Siziphiwe Ngxabi is a 2009 Mandela Rhodes Scholar.