Minyan Peter, a former treasurer for a very large U.S. bank offered these thoughts on Any Credibility Left At Fitch?

To Mish’s piece this morning, for financial institutions being “on watch for possible
downgrade” has always been intended to enable banks and other financial institutions to get their liquidity houses in order and to allow for an orderly liquidation of commercial paper and long term debt by credit sensitive institutions, particularly money market funds.

Clearly Fitch and the other rating agencies are trying to enable the bond insurers to pursue capital raising alternatives before being forced to act.

Several weeks ago I wrote that the market is getting close to the point where the consequences of debt downgrades – particularly structured debt – by the rating agencies will create such a snowballing effect, as the repercussions flow across the financial services industry, that they are paralyzed – either on their own or by the regulators.

While we are not there yet, it is certainly not hard to see how we could quickly get
there.

The article to which Peter refers is called The Ripple Effect of Collateralized Debt Downgrades. It is well worth the read.

Here is a comment on Fitch from my friend Heinz:

Fitch may think it can ‘save’ the guarantors and all they guarantee by delaying downgrade action, but the market tells us already that these companies are junk. Eventually, growing losses will force Fitch to downgrade, like it or not. Note that Fitch is opening itself up to a plethora of law suits if it fails to downgrade in spite of glaring evidence.

The lawsuits are all but guaranteed given Fitch is explicitly admitting that it is making rating decisions not on merit alone, but on perceived implications of what a rating change might do to the company being rated.

Mike Shedlock / Mish
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