Recently, we talked about how Warren Buffet’s Congressional testimony about Moody’s responsibility for causing the banking crisis and stock market crash by rating collateral mortgage options (CMO) triple-A up until it was already obvious to everyone that these investments were in trouble, was wrong headed. Today, the ratings agencies Fitch and Moody’s gave us all another reason to wonder why we listen to rating agencies at all with its downgrade of British Petroleum.
It is not that downgrading BP is incorrect. It is both the timing and the sanctimonious nature of how the downgrades British Petroleum (BP plc – NYSE:BP) stock and debt came about.
It has been six weeks since the April 20th explosion on the Deepwater Horizon oil rig and the company’s stock has already fallen over 40% since the incident. Which has been a big hit on Members of Congress are calling for BP to put $20 billion into some sort of escrow fund out of concerns that the company may end up not being able to fully pay its legal obligations resulting from the massive gulf oil spill. Yet, both Moody’s and Fitch’s statements act like their concerns about BP are actually news to anyone.
“Today’s downgrade of BP’s long-term debt ratings reflects Moody’s expectatoin that the protracted oil spill … will result in significant containment and clean-up costs as well as litigation costs.”
Really? Gee Mr. Wizard, thanks for letting all us dumb Main Street investors know that we should be concerned about how much the cleanup of the biggest ever oil spill is going to cost British Petroleum, because otherwise we would have naively assumed that there would be no impact on the earnings of BP nor its ability to repay debt.
In other words, what are the ratings agencies good for again?
While I completely understand that downgrading a company’s credit rating is a very big deal and should not be taken lightly, it seems that the rating agencies are a day late and a dollar short, as my father would say. What value is there in investors waiting for the opinions of the major rating agencies?
To put it another way, if your credit rating score from FICO took this long to update, Fair Issacs would be out of business within the year, and yet, the business equivalent moves so slow that if they handled consumer credit you would be able to open a dozen new rewards credit cards before your score got lowered from 750 to 600 after you defaulted on your home equity loan.
Today’s downgrade simply gives financial writers one more thing to talk about and provides the “proof” necessary for newspapers and magazines to start talking about how the oil spill has hurt BP financially. Otherwise, there just isn’t any value in being told what investors already know.