Calling A Foul On The Ratings Agencies: Pre-Approving AIG (AIG) Deal

Clearly feeling the need to debase themselves further after their role in the subprime mortgage mess, the two major credit agencies are signaling that they will hold their ratings on AIG (AIG)  steady once it has concluded a new arrangement with the federal government for more aid .

The terms of the transaction with the Fed will give AIG access to as much as $30 billion in new funding from the TARP. The agency will get equity in two of the insurance company’s most valuable units. All of this comes on the heels of AIG reporting a net Q4 loss of $61.7 billion compared to net loss of $5.3 billion in the same quarter a year ago..

According to The Wall Street Journal, “Without the support of the credit rating agencies, AIG would have faced crippling cuts to its ratings. The downgrades would likely have forced it to post billions in collateral on an array of financial contracts.”

Since when was it the job of the the credit agencies to implicitly act on behalf of the government and a company, in this case AIG, which is 80% owned by the government? Did the credit agencies huddle with GE (GE) before it cut it dividend to tell the conglomerate the move would save its “Triple-A” rating? Obviously not.

If the credit rating firms are to become slaves which support the government’s ability to inject capital into companies with a positive effect on the value of their debt and the interest rates that they will pay for raising additional money, credit ratings have been ruined.

The credit rating industry was nearly ruined when it blessed the safety of mortgage-backed securities. Now it has defiled themselves by acting as agents of the Treasury and the Fed.

As the economy falls further and further into recession, the issue of the safety of corporate, state, and municipal debt will only become larger as investors seek safe havens.  There is no longer any place to turn to get reliable expert opinions.

Douglas A. McIntyre