The question is more of whether the initial higher ratings were justified.
I am sure the intricate methodology which ratings agencies use to conclude if companies can pay or not pay their debt are well thought out.
However, they just seemed to always be one step behind, and rarely ahead of the market in assessing credit quality.
And if that’s going to be the case, it begs the question of the role of ratings agencies and the wisdom of overly relying on their current views.
There are other ways to judge risky investments, and the credit default swap market a good alternative barometer. It started pricing in the possibility of sovereign downgrades for Greece, Portugal and Spain since last year. Time and time again, looking at credit default swap spreads has proven to be a helpful predictor of forthcoming probems.
Perhaps its time to take a long and hard look at possible conflicts of interest where ratings agencies are being paid by companies and countries (issuers) to rate them. It's like movie critics being paid by the studios to review films. Are there internal pressures to “be nice” to their paying customers to keep ratings within expectations?
The role of the ratings agencies is it to advise the investment community of a change in a company or country's risk to its ability to repay its debt. It's an important role and necessary. But unless agencies get ahead of curve they risk becoming irrelevant. AAA needs to mean more than what it has in the past.
Future trust depends on it.
Program Note: Mr. Yoshikami will be a guest with Maria Bartiromo on CNBC's Closing Belltoday at 3:20pm/ET.