EUROPE, THE U.S. AND CREDIT RATINGS

Fitch downgrades Greek bonds. Moody's cuts Ireland's credit rating. Moody and Standard & Poor threaten to lower U.S. credit rating if the debt ceiling issue is not resolved. In making announcements of such actions, the big three of credit rating agencies capture headlines in newspapers and become the talking topics of television news because these agencies are movers and shakers in international financial markets.

What boggles the mind is that credit rating agencies which now bring gloom and doom to fiscally struggling countries are the same agencies attacked just a short time ago for prostituting themselves in overrating the quality of bonds backed by home mortgages and in doing so contributed to the collapse of the housing market which was and remains a major part of our economic time of troubles.

This is not saying that the same people within credit rating firms made and are making decisions both on the quality of housing-backed securities and national credit ratings, but only to suggest the power of these agencies and our willingness to take their advice as a close approximation of the truth. Certainly in rating housing-backed bonds, these agencies raised serious questions about their willingness to compromise their integrity and professional ethics to enrich themselves.

That process went something like this. An investment bank wanted to sell a large bond issue whose collateral is thousands of home mortgages. The particular mortgages involved included solid ones which were certain to be repaid by homeowners while others in the bond package were subprime mortgages which had a high probability of not being paid by the financially unqualified home buyer. The investment banker shopped around the credit agencies and paid a fee to the one which would give the highest rating to the bond issue. So rating agency X said it would give a AA rating to the issue, knowing the bonds had a good chance of going sour because of the bad home loans included in the package. Rating agency Y said it would give an A rating to the package. While both overrated the bonds, X got the fee.

Assessing a country's credit rating is certainly a different process, but are the ratings reasonably accurate? There is no question that Greece, for example, has put itself into such a financial hole that it merits a junk bond rating or something close to it, meaning that if it tries to sell new bonds, it will have to pay a very high interest rate to attract any buyers. But the overall process of rating a country's credit worthiness opens up a range of opportunities for the financial community to make money from low ratings. And don't forget that part of Greece's problem is because Wall Street giant Goldman Sachs and other banks helped Greece to hide the magnitude of its growing deficits.

And this doesn't even get to the messy next layer of credit default swaps which in effect are insurance policies for the investors to protect against losses on the bonds. For example, hedge fund X buys Greek bonds and then buys insurance from another firm that will pay for losses if Greece's credit rating declines to a certain level. If a credit agency or agencies subsequently downgrades the country's credit rating then the insurance policy is paid off to the hedge fund. And as a country's credit rating drops, the insurance on its bonds cost more. So how much are we able to rely on the credit rating agencies which provide various avenues for money making in the bond market, including profits by financial manipulation such as short selling. On the other hand, an investor needs guidance on the credit worthiness of a country before putting his or her money on the line and there doesn't seem to be an alternative to the credit rating agencies for such guidance.

Certainly this is a task worthy of Diogenes carrying his lantern seeking to find an honest man or woman.