The overhaul is part of the agency's drive to 'improve products' and repair its reputation. At the expense of the banks', obviously.
Ratings agencies are like funeral directors. They always come with bad news. Early this morning Standard and Poor's, donning metaphorical mourning wear, presided over the demise of the A-1 and A-1+ ratings of Bank of America, Merrill Lynch. Citibank, HBOS, Morgan Stanley, Goldman Sachs, RBS, HSBC and Barclays among others.
The downgrades couldn't come at a worse time. The arteries of credit in the global financial system are already clotted and a lower rating spells higher interest rates on borrowing and yet another dip in investor confidence. Way to go, S&P.
In its defence, Standard & Poor's would say that the rating downgrades were long overdue. On Monday, the agency warned that it was re-working its rating measurements, possibly to the detriment of many institutions. But ratings are a strange construct, mercurial in nature and often misleading. For example, these new ratings are apparently the result of adjustments in methodology rather than real reflections on the banks themselves. S&P is only revamping its system because previous strings of As +s and -s have proven utterly worthless in the past.
That's not to say the announcement hasn't made the markets extremely skittish. After the wide-ranging downgrades were announced, the FTSe reacted immediately. Barclays, HSBC, RBS and Lloyds all fell between one and 2%. UK banks have taken an absolute hammering on the markets this year, losing up to 30% of their share prices in the last six months.
S&P may have undertaken the necessary steps to secure its reputation and highlight the flaws in a cluster of financial corps, but it may prove a Phyrric victory. This is no Enron or Freddie Mac scenario; the delay on downgrades in those cases led to series fall-out in the markets but everyone already knows that the banks are under the cosh. For once, the famously glacial pace of the agencies could have actually been beneficial, allowing the banks to recover some confidence, armed with their gold-plated ratings, and ensuring interest rates stayed low a little longer.
But that's like a funeral director keeping prospective clients from Death's door, it's just bad business.