Ouch! Credit crisis: the worst is yet to come
The Chairman of the Federal Reserve himself has blamed the estimated $180 billion in subprime related write-offs squarely on Standard & Poors, Fitch and Moody’s – the so-called ‘Big Three.’
They gave AAA ratings to bonds sold on by investors who’d had paid for the rating, a situation which would seem to be a conflict of interest.
Standard & Poor’s president resigned after failing to downgrade some bonds until July, when they’d already haemorrhaged 50 cents on the dollar.
However, the Expert Rating Agency, which outperforms the Big Three in Russia, has warned that rivals are accepting even worse conflicts of interest.
Experts believe that Russia has to date remained relatively unaffected only because its banking system is underdeveloped, but VTB, Russia’s second largest bank, believe this underdevelopment is forcing firms in Russia to tap foreign sources of finance, which, while they may be more advanced, are also riskier.
Experts also warn this is only the first phase of the crisis. Now that subprime banks have an idea of their losses, lawyers are queuing up for the kill.
The head of litigation at legal giant Slaughter & May says “The sums involved are very large, the upside of getting it right will therefore be high.”
Meanwhile, the Financial Times comments that credit rating agencies must feel as vulnerable as a nude gymnast performing squat jumps in a porcupine farm.