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Can We Really Trust the Credit Ratings Agencies?

Amanda Alix
July 5, 2012

As I was researching an article on the recent bank credit rating downgrade, I began to wonder about how agencies such as Moody’s (NYSE: MCO  ) , Standard & Poor's, and Fitch treated banks right before the financial meltdown.  Banks that were punished last month – JP Morgan Chase (NYSE: JPM  ) , Goldman Sachs (NYSE: GS  ) , Citigroup (NYSE: C  ) , Morgan Stanley (NYSE: MS  ) , and Bank of America (NYSE: BAC  ) were considered top-drawer back in the day, yet everyone now knows that each of those banks received billions i n bailout funds – with B of A, Citigroup, and JP Morgan getting the biggest boosts.

Another example of the glamour effect
A recent news item helps to explain just how close the relationship between banker and credit rater was in those heady, pre-crash days of yesteryear.  An investor lawsuit against Morgan Stanley alleges that the bank somehow convinced S&P to give the best possible ratings to a bucket full of securities backed by subprime mortgages.  A