BOTTOM LINE:SINCE LAST Thursday's downgrading of 15 international banks by Moody's, the financial press has been awash with the news that nobody cares anymore.

One of the “big two” credit rating agencies took action on some of the world’s largest financial institutions, and the market barely shuddered. In fact, many bank stocks rallied the following day.

As you may have read in these pages earlier this week, Bloomberg recently examined market reaction to 314 rating actions since 1974 and found that, almost half the time, government bond yields fell when a rating action suggested they should climb.

Perhaps the most pointed illustration of this came last year when Standard Poor’s downgraded the US government’s AAA sovereign credit rating. Since then, yields on US debt have hit historic lows – again, suggesting that investors have blithely dismissed the view of the agency.

It is worth noting that the top three credit rating agencies – Moody’s Investor Service, Standard Poor’s and Fitch Ratings – are simply publicly-traded companies, or subsidiaries of such. While their ratings are recognised in the US by the Securities and Exchange Commission for regulatory compliance purposes, they are not internationally-appointed bodies with a higher mandate. Some people have even taken to calling them “rating companies” to stress their private, unofficial status.

Issuers pay the agencies to rate their securities, and investors pay for access to their data. In other words, they offer a service and those who want it pay for it. And, in a few cases, if customers don’t agree with the rating given, they even fire the agency – as happened earlier this year when the Danish mortgage lender Nykredit said it had terminated its contract with Moody’s because of the agency’s “volatile view of the Danish mortgage industry in recent years”.

The country ratings issued by the agencies are just a little bonus on the side.

The one concrete knock-on effect of last week’s rating action by Moody’s is that it will affect the funding costs of many of these institutions – “all because of the opinion of a small group of New York-based credit analysts whom many criticise for missing the excesses that exacerbated the crisis”, as the Financial Times wrote after Thursday’s action. The insinuation here is that the agencies have an outsized influence that, given their recent track record, is unjustified.

Richard Robb, co-founder of the New York and London-based investment firm Christofferson, Robb and Co, says the FT’s description of the power wielded by the agencies with regard to funding costs is exaggerated.

“If we saw tiering of funding costs that closely corresponded to banks ratings, I think we would conclude that ratings companies – as I like to call them – have too much power. But we don’t,” he said.

To illustrate Robb’s point, consider this: Lloyds Banking Group and Unicredit are both currently rated A3 with a “negative outlook” by Moody’s. But the cost of insuring against a default by Unicredit is three times higher than it is for Lloyds.

Similarly, the cost of a five-year credit default swap (CDS) on Bank of America, which is rated Baa2 with a negative outlook, is less than that for the same CDS on Société Générale – rated A2 and stable. In other words, the market has taken the views of the various rating agencies into account and come to its own conclusions about the creditworthiness of these institutions.

Robb does agree that the recent downgrades will have a knock-on effect on the cost of funding for the likes of Credit Suisse and Morgan Stanley in particular, but says most of the affected banks are now in a position to handle that.

This underscores the fact that Moody’s is “playing catch-up” with these downgrades, since many banks were rated higher when they held less capital.

Robb says there is a reason the company is slow to adjust its ratings. “The catch-up doesn’t come solely through laziness or incompetence, but partly out of an awareness of the influence that they wield,” he said. “If they had downgraded these banks three years ago when they were more vulnerable, they would have had blood on their hands . . . they might have put them out of business.”

However, he believes the rating agencies are still relevant as part of a broad mix of opinion that goes into formulating an investment strategy, despite any anomalies or inconsistencies.

David Ader, head of rates strategy at the Stamford, Connecticut-based firm CRT Capital, agrees. “They are, of course, still relevant. They have to be, right? Because somebody’s paying them so somebody thinks they’re still relevant,” he said.

“If we get a weak set of data later in the week, does it change anything? And if we don’t respond, does it mean that data is no longer relevant? Of course it’s relevant, but it’s been doing this all along. It’s just a point of diminishing returns.”

Ultimately, Robb and Ader’s views amount to this: nobody – not Joe Investor and not those with trillions under management – should rely entirely on the views of the rating agencies in managing their portfolio. If they were ever the final word on securities, they should not have been. But to dismiss them as irrelevant is to throw the baby out with the bathwater.

Moody’s, Standard Poor’s and Fitch are simply publicly- traded companies or subsidiaries