Moody's Investors Service gave its token credit downgrade to a dozen global banks (IXG) including five of the six largest U.S. banks—and financial stocks responded by shooting higher. What's going on?
Just after the downgrades were announced, the SPDR S&P Bank ETF (KBE) closed ahead by 1.36% while financial stocks (XLK) within the S&P 500 ended higher by 0.92%. Have ratings become a contrarian indicator? Why would the financial sector rally in the face of declining credit quality?
One explanation is the waning credibility of credit rating agencies.
It's no secret that mis-rated debt contributed in part to the 2008-09 financial crisis.
A Senate panel found that rating agencies directly participated in a "race to the bottom" by inflating creditworthiness to win business from Wall Street banks.
Since the crisis, the credit rating trio—Fitch Ratings, Moody's, and Standard & Poor's—have struggled to wipe clean their marred reputations. Yet, cosmetic changes and phony reforms have hardly increased the accuracy of ratings, nor have they altered the way ratings are doled out.
