Ratings notches

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Grades assigned to financial instruments and issuers by rating agencies to save the honest toilers in the asset management industry the bother of conducting fundamental financial analysis on said issuers and instruments before piling into their securities on behalf of his client roster of pensioners orphans, the morally weak and other similar mutual fund investors.

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Now a cynic (who? Moi?) might wonder just what such an honest toiler would be bringing to the investment decision if all he was doing was relying on a published rating — isn’t that a bit like judging a film on its a star rating from the film critic in the Daily Express? — but nor is expecting every asset manager in the land to conduct the same fundamental analysis on the same issuers and instruments a fabulously efficient use of resources either. Except that they might, you know, use different methodologies, have different opinions and provide diverse perspectives, right? If only that were what people in the industry used credit ratings for.

Nevertheless a good example of the perils of a second order derivative measure of quality: at least if you expect your asset manager to be able to conduct fundamental financial analysis, she might be able to pick up something that the rating agencies had missed. Relying entirely upon ratings opens up the market to any bullshit artist who knows his ABCs — all right, and his Aa1s, Aa2s and Aa3s — to make quick coin in a sucker's market.

And as in the early part of the millennium, we saw regulatory capital ratios predicated on ratings, meaning anyone who could hoodwink gullible rating agency professionals with a sophisticated cashflow model could create financial instruments with the potential to detonate the financial markets as we know them. Just as well that never happened.

Anyway, here, with feeling, you can find the ratings notches of each of the main organisations:

  • S&P: here (as set out by Wikipedia)
  • Moody’s: here (as published by Moody’s in a handy PDF).

See also