Thread by @Dhruvapandey

Is it entirely rating agencies fault?

There is a lot of blame been put on rating agencies for the recent default of DHFL & IL&FS and they are so extreme that some of the writings indicate that it's entirely their fault.

People make fun of how come these guys didn't see it coming, As if it was damn obvious and everyone saw it coming.
People r surprised that how come AAA got downgraded D in one shot, Yes that's how a financial institution leveraged 10x defaults.

It doesn't take rocket science to understand If u r levered 100 to 10 then 10% change in default wipes out ur equity.
In 2017 these levered companies were trading 5x -10x book that's more surprising to me.

Fact is nobody saw it coming, If u bought IF&FS or DHFL papers thinking that they will default like a cement company or power generation company losing their competitive advantage i.e, gradual decline in ratings then it's your fault ( Not rating agencies fault.)

It was not long ago Lehman brothers downgraded from AAA to D, That's how it works & if you don't know that then u deserve to lose money for the risks you are taking.

Moreover, rating agencies don't Audit their books its the job of Auditors, they completely rely on that. Rating agencies are paid peanuts compared to the total market size, HDFC bank net profits > combined Mcap of rating agencies.

You want a system where Rating agencies do all the due diligence rate just perfect for peanuts and then banks, u and me all make supernormal profits out of it?
Anybody can lend looking at just rating, I wish life to be that easy.

No, that not how the system works the larger profit share from all the lending is taken by creditor they are supposed to do their due diligence.
I feel sad for you that u lost money in DHFL bond but u r still an idiot if u blame credit rating agency for that.

Secondly, Lots of arguments are thrown saying stock markets saw it coming & y rating agencies were sleeping?
Yes, It would be a disaster for rating agencies to start speculating.

Imagine if a company which is in stress but trying their best to come out of the mess and rating agencies take a proactive step to mark them down to D saying " I think they will default no matter what that idiot entrepreneur do "

In that case, there is no way they can come of the mess even if they could have.
Let's leave this job to stock markets let them speculate and we know the very same stock market did an amazing job of gazing DHFL future prospect not very long ago.

End of the its the whole ecosystem that needs to be blamed, the creditors of DHFL & IL&FS for not doing their own due diligence bcoz they take the maximum risk & they take the maximum reward, the Auditors for not pointing out irregularities,

, the rating agencies for not painting out the potential risks.
I don't think anyone should be blamed, it's just the nature of capitalism, bad companies will die eventually and this very act will make the system healthier for potentially higher future growth.