Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Investors Misled by Credit Ratings Agency

Politics / Credit Crisis 2012 Nov 10, 2012 - 11:40 AM GMT

By: InvestmentContrarian

Politics

Best Financial Markets Analysis ArticleSasha Cekerevac writes: In what will most likely be a landmark ruling, Australia’s federal court has ruled that one of the world’s leading credit ratings agencies Standard & Poor’s (S&P) misled investors by issuing a AAA rating, its safest rating, to securities that were extremely complex and risky, and that ultimately lost most of their value.


One of the biggest problems following the crash is that investor sentiment has soured on the financial industry. Many people have the market view that the game has been rigged against the retail investor. During the bubble prior to the crash, rating agencies like S&P continually slapped AAA on risky investments. The entire system was built on generating revenue and commissions by packaging products that could be sold to people who should not have been buying them in the first place. By creating a false market view, investors who normally wouldn’t buy risky assets were tricked into believing that they were safe. This blatant misrepresentation has led to a lack of positive investor sentiment across many facets of the financial system.

Investor sentiment can be extremely fragile. Rulings such as this finally capture the anger that many have felt over the past few years. While investors have lost untold amounts of money, the rating agencies that people and institutions have relied upon have gotten off without any liability. The market view was that rating agencies could do whatever they wanted without repercussions. This appears to be changing.

Justice Jayne Jagot of Australia’s federal court stated that S&P was “misleading and deceptive” when it came to rating structured debt instruments during 2006. The debt instruments themselves were grotesquely complicated, according to her. (Source: “Standard & Poor’s misled investors—Australian court,” BBC, November 6, 2012.)

Not only did the courts find that S&P had published false and misleading information, but they also found that the firm had negligently misrepresented the risks associated to potential investors. In some cases, the court has found out that S&P didn’t even conduct its own calculations. It relied on the bank that was structuring the product for the calculations.

No wonder investor sentiment is so poor. If S&P can’t even do the basic due diligence, the market view for the products it rates should be taken into consideration with much more than a grain of salt. In fact, it raises the question of who even pays attention to S&P anymore, since it has lost most, if not all, of its credibility.

This ruling will certainly pave the way for further actions in America and Europe against rating agencies. Investor sentiment needs to rebound, and the only way this will occur is if the integrity of the financial system is reinforced. Part of the problem is that credit agencies are paid by issuers. This system can certainly create plenty of conflicts of interest. If the market view is that firms are not being honest in their assessment, investor sentiment will continue to be poor.

S&P is a division of The McGraw-Hill Companies, Inc. (NYSE/MHP), whose shares have significantly sold off on this ruling. While S&P will be appealing the decision, it certainly is a major blow against rating agencies around the world.

Ultimately, we need to see more accountability throughout the financial system to regain confidence in investor sentiment. At the very least, this type of ruling will start to tilt public sentiment in believing that reforms can be made. Another side effect might be the rise of smaller, independent financial service firms that can provide unbiased information. While I applaud the Australian courts, much more work needs to be done to clean up the financial system and regain confidence and investor sentiment.

Source: http://www.investmentcontrarians.com/stock-market/investors-misled-by-rating-agency/982/

By Sasha Cekerevac, BA
www.investmentcontrarians.com

Investment Contrarians is our daily financial e-letter dedicated to helping investors make money by going against the “herd mentality.”

Copyright © 2012 Investment Contrarians- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in