Does loss of Triple-A rating matter?

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Kai Ryssdal: Warren Buffett's Berkshire Hathaway holding company has gotten a financial poke in the eye. It lost its AAA credit rating today. The downgrade from Fitch -- that's one of the three big credit rating agencies -- leaves Berkshire at what's called AA plus. That means it has a slightly higher risk of defaulting on its debt than before. The decision by Fitch came just hours after S&P did the same thing to General Electric. It is now at AA plus as well. And that means each company will have to pay more to borrow money -- not a good thing in a time of tight credit. Here's Marketplace's Jeremy Hobson with more on rating deflation.


Jeremy Hobson: So, what does it mean to be AAA? It's kind of like the way the credit card companies look at you if you've got a great FICO score.

Nicki Riccio: You are going to pay back your debt without any doubt.

Nick Riccio is managing director in corporate ratings at Standard and Poors. He says the number of companies that can pay back their debt without any doubt has been falling for years.

Riccio: There are five left. Alright? At one time that number was about 32, but over the last couple of decades, we've been kind of sliding a little bit.

More than a little bit. Riccio says the vast majority of American companies are rated junk these days. Gerald Epstein is an economist at the University of Massachusetts. He says with these downgrades, the rating agencies are just stating the obvious.

Gerald Epstein: Anybody who looks carefully at what's going on in the financial markets knows that Berkshire Hathaway is -- it has some investments that are in trouble. You don't really need the credit rating agencies to tell you that.

Epstein says agencies like S&P lost his confidence when they failed to rate mortgage backed bonds correctly. He says their ratings on companies are more reliable. But he says they're not quick enough on the draw.

Epstein: They really in a sense contribute to the business cycle by the way that they do these ratings. I would prefer to see them do ratings in a much more long-term kind of way, rather than go up with the cycle and being over-pessimistic on the way down.

Epstein says until the rating agencies get more transparent about the way they do business, that extra A in the rating doesn't mean much.

In New York, I'm Jeremy Hobson for Marketplace.

About the author

Jeremy Hobson is host of Marketplace Morning Report, where he looks at business news from a global perspective to prepare listeners for the day ahead.

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