Stupid Credit Agencies

I feel like credit agencies should receive more blame and public criticism for the collapse of Enron and AIG. The credit agencies did not do their job adequately and gave these companies a triple A rating when they did not deserve it. I understand that companies like Enron are so large and have very confusing financial statements so it’s hard to evaluate them. But in the end of the day, it is the job of the credit agencies to properly evaluate these companies regardless of their size. I feel like it is unethical to assign a company like Enron a AAA rating if they don’t deserve it. It took too many years for credit agencies to actually understand that these companies were falsifying their financial statements and misrepresenting their debt. Once AIG lost their AAA credit rating, the public lost trust in them and AIG began to collapse.

                I feel like a credit agency should not be directly related to any company that they are evaluating. For example, a neutral agency like the government should pay these credit agencies so the credit agencies are honest. These credit agencies were in AIG’s business plan because AIG needed to receive the AAA rating. The public trusts that these credit ratings are accurate and truthful when they are looking to invest their money. If the credit agencies were not directly related to companies like AIG and Enron then the credit companies would do a better job at evaluating the credibility of these companies.

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7 Responses to Stupid Credit Agencies

  1. awhigbee says:

    I totally agree! Except for the government part…usually government involvement with these matters could lead to some weird stuff. The credit agencies for the most part are neutral but there really is no excuse for them doing a poor job especially in the case of Enron. Although financial statements are complicated how can they of all people not figure it out or at least ask? The issue with AIG is that no one actually asked whereas Enron was just confusing. The credit agencies that we rely on to help us make smart investments and keep our money safe should always know the real deal.

  2. jte004 says:

    I would agree with this post, because the credit agencies do carry a portion of the blame for the collaspe of AIG and Enron. I really liked the point about how the credit rating companies should not have any connections to the company that they are rating. This makes a lot of sense to have an independent credit rating company in charge of rating each other company. Something that should be avoided though is public scrutiny of the credit agencies because that only leads to more problems. In learning about both companies collapse it is clear that the credit agencies had a portion of the blame to bare, but does not the majority of the fault lie on the company it self and the people that either refused to ask the right questions or didn’t want to know the truth?

  3. Jordi says:

    Yeah tags! and categories…
    Now, if you go to the wordpress tag surfer and add “aig” or anything else after /tags/ in the URL bar, you can see what else is in wordpress about AIG, Enron, and so on.

  4. katiebaum13 says:

    I think you made many very interesting points in you blog. I agree with you that the credit agencies did play a major role in the fall of both AIG and Enron. The point made about how credit agencies should not be connected to the company they work for is something I never really thought about and I think it is a very good point. Especially in the market today, it is very important to keep companies in an honest position, where they do their job not in the interest of themselves but in the interest of the public. The comment made above me about not publicly scrutinizing the credit agencies is very true. I feel that it would create a lot of unnecessary problems in the future.

  5. mnickels says:

    I agree with mostly everything you said in your post, and the above comments. Credit agencies play a large part in a company’s success sometimes I think since people will be more likely to invest in AAA rated ones than AA, and the credit agencies are the ones that create this whole rating. Once one mistake is made about the rating, I feel like the whole system can become off and it can create a large downward spiral. Companies need to state their finances correctly and credit agencies need to give correct ratings, but how can you ensure the best rating when companies make up finances and state things incorrectly? In our economy today, it’s hard to ensure everything its totally correct.

  6. mmilne23 says:

    I agree that too much emphasis is put on credit agencies and upgrades and downgrades. However I do not necessarily agree with you on the part about having the government pay the credit agencies because it would be unbiased. Rating agencies rate government debt so therefore the payment would be very biased. Also looking back at this summer when S&P downgraded US debt from its AAA rating would prove even further that it would come from a very biased place. Something should be done though by the government to not put as much emphasis on rating. It’s crazy to me how an opinion of a rating agency can matter so much for the future of a company.

  7. knr004 says:

    I agree with some of the posts in saying that the whole idea of a rating may not be the best way to judge. Perhaps I think this, because I truly believe the ratings system is extremely biased. To touch on the article we read “How Did the Econmists Get it so wrong?” I agree with Krugman that we seem obssessed with this idea of being perfect. Even as students we obsess over the grading scale, and we practically kill for every hundreth of a point for our GPAs. We must have that perfect label, we have to have that AAA credit rating. It is in our nature to find a way to keep things at the status quo. Reducing the rating means admitting a problem which means tough questions with complex answers. Who wants that? There has to be a better way to evaluate then just a simple scale.

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