S&P once again shows how far into the future they look when determining ratings. From Bloomberg, Goldman, UBS, Deutsche, Morgan Stanley Lowered by S&P:

Goldman Sachs Group Inc., UBS AG, Deutsche Bank AG and Morgan Stanley are among a dozen financial companies whose ratings or outlooks were cut by Standard & Poor’s, which cited rising risks for the banking industry.

“The downgrades and revised outlooks reflect our view of the significant pressure on large complex financial institutions’ future performance due to increasing bank industry risk and the deepening global economic slowdown,” S&P said in a statement.

Banks worldwide have reported more than $745 billion of writedowns and losses since the credit crisis began, according to data compiled by Bloomberg. S&P said it expects banks to face more volatility in funding markets and a higher level of stress than in a “typical business-cycle trough.”

“The macro outlook in the U.K. and U.S. banking sector has worsened materially,” said Sandy Chen, a London-based banking analyst at Panmure Gordon & Co. “They’re looking at the risk of what the combination of deleveraging and deflation could do to banks’ earnings.”

In other news (that I heard on CNBC, but can’t find an article for), Moody’s has lowered ratings on several pools of jumbo mortgages originated by Merrill Lynch, Countrywide Financial, and Bank of America. All of those are now Bank of America. It’s unknown how many of those mortgages are still on the books of Bank of America.

There’s trouble in the banking industry? There’s risk in the jumbo loan market? Who knew?

Without sarcasm, the only reason the ratings agencies are relevant is that many debt contracts exist that require the posting of additional collateral in the face of a downgrade. Some mutual funds have provisions to invest in only AAA rated companies. Most of the time, though, investors moved ahead of the ratings agencies by a huge margin. In fact, a few of the ratings agencies now provide “implied” ratings, determined by the yields in the bond market. You know what? It turns out the market rates are much more meaningful than the ones given by the ratings agencies. Still, the government has given the ratings agencies special status, and created a self-perpetuating market based on privilege instead of capability. The agencies should be stripped of their special status and the designation and the special status should be eliminated.