Credit Crisis Defaults: Will Rating Services Warn You in Time?

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Credit Crisis Defaults: Will Rating Services Warn You in Time?
In the past, the rating services have been "woefully late"

By Bob Stokes
Tue, 15 Nov 2011 17:15:00 ET

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Forget "recession." Our independent analysis suggests that we are in the early stages of an economic depression.

Robert Prechter wrote a book to help readers prepare for what's ahead. He offered a wealth of "financial protection" insights, including an explanation of why it's not wise to rely on ratings services for timely warnings:

"The most widely utilized rating services are almost always woefully late in warning you of problems within financial institutions. They often seem to get news about a company around the time that everyone else does...In severe cases, a company can collapse before the standard rating services know what hit it. When all you can see is dust, they just skip the downgrading process and shift the company’s rating from 'investment grade' to 'default' status."

Conquer the Crash, 2nd edition, p. 224

Prechter also points out that Enron bonds had an "investment grade" just four days before it went bankrupt.

MF Global is another very recent example of why you should not rely on rating services for financial warnings. As you'll recall, MF filed for bankruptcy on October 31 after a big European debt trade went south. It's the biggest financial firm to implode since Lehman Brothers.

Yet MF was top-rated when now-resigned CEO Jon Corzine took over just last year:

"Moody's Investors Service said it saw no reason to change its rating of MF Global when Jon Corzine became CEO of the Manhattan-based brokerage in March 2010."

USAToday, November 10

True, rating services had no way of knowing that MF would eventually assume too much risk...

...But that's the point.

As you'll recall from the Conquer the Crash, 2nd edition quote above, "[Rating services] often seem to get news about a company around the time that everyone else does..."

The question an investor should ask is, Are other top-rated financial firms still taking on too much risk?

In 2008, we all saw how rapidly a financial crisis can spread. And looking at the MF Global collapse we're reminded of how quickly a firm can go from seemingly good shape to "good-bye."

As mentioned above, a big bet on European sovereign debt was the undoing of MF Global. Our latest Financial Forecast says "...Europe is the epicenter of the credit crisis," and observes that "The current level of unpayable debt is too big to bail."

It's reasonable to believe that many more financial shoes will drop -- in Europe and the U.S. Many firms which seem to be in sound financial health today may meet their demise tomorrow.

Read our special section on Europe plus our comprehensive U.S. analysis in the November Financial Forecast. Learn how you can save 57% via a limited-time offer by following this link>>

Epicenter Europe: Will Shock Waves Be Too Swift for the Rating Services?

Take your RISK-FREE read of our European and U.S. analysis in a Special Financial Forecast.

Save $135 via a LIMITED-TIME offer. Follow this link to prepare for the rapid changes we see ahead>>

Tags: bailouts, conquer the crash, credit crisis, credit default swaps, credit rating, debt crisis, debt downgrade, economic depression, European debt crisis, European Union (EU), eurozone, Robert Prechter, soverign debt crisis

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