Do credit ratings agencies matter anymore?

This is a relevant question given that credit ratings agencies find themselves featured prominently in the news. In some ways, the on-going U.S. debt ceiling story has been a PR win for the agencies, especially Standard & Poor's, because for the most part they have been portrayed in their traditional role: as an objective agency that has the expertise to evaluate whether various issues are in good position or not to make good on their debts.

The fact that the companies' pronouncements of possible downgrades to U.S. debt has been taken seriously in Washington may be a sign that the extreme cynicism that recently engulfed Standard & Poor's, Moody's and Fitch may be evaporating a bit.

Lost amid the U.S. debt ceiling drama was the scheduled testimony Deven Sharma, president of Standard & Poor's, before the House Committee on Financial Services. His scheduled Q&A was intended to be about the steps the company has taken to correct some of the excesses that were exposed in the financial crunch, when the credibility of traditional credit rater sunk to new lows. But the main topic at times seemed to be the likelihood and consequences of a U.S. default and what S&P thought about the U.S.'s AAA rating. (Here's his written testimony, which goes into detail about the many steps the company has taken to reform its processes.)

While the ratings companies are being taken seriously (with a dose of cynicism) on the U.S. debt issue, we shouldn't lose sight of the bigger picture. The U.S. government is in the middle of a broad effort to reduce its reliance on bond ratings for regulatory purposes. Recall that Dodd-Frank requires federal agencies to get rid of any reliance on ratings for regulatory purposes. The SEC also aims to reduce its reliance on ratings. Most would regard this movement as a good thing.

So we're in an odd position. At a time when people would like to believe that credit rating firms have been reformed, these companies find themselves in a position of influence over the government. The agencies would be wise not to get cocky. Already we're hearing some "who do you think you are?" criticism. Some are arguing that their views matter less than most people think. Another commentator, writing in the WSJ, thinks the government is according too much significance to the credit raters' views. "S&P and others offer nothing of value in rating the messiness of our political debates. On the contrary, they step out of line in presuming they must be satisfied with our current spending priorities in order to be satisfied with the long-term payability of America's formal debt."

One thought here is that the bond raters still matter, but only when their opinion serves some larger political or financial purpose. - Jim