Here's proof that credit rating agencies are just the worst

Credit rating agencies were vilified during the financial crisis for failing to detect risk in the subprime market before it was too late.

And in a recent note to clients, Sivan Mahadevan's team at Morgan Stanley looked at the "Fallen Angel Spread," or difference between the lowest-rated investment grade debt (BBB rated) and the highest-rated junk debt, and discovered just how clueless rating agencies really are.

According to Morgan Stanley, "It appears that rating agencies are oftentimes 'late to the game,' as their ratings decision usually occurs after materially negative information has already been well disseminated in the investor community."

The chart shows BBB spreads widen ahead of a downgrade and blow out on the downgrade event.

However, once the downgrade is digested, the BB spread tightens. It seems then that for investors, the rating agency opinion only matters after the fact.

Morgan Stanley

Moody's has significantly outperformed the S&P 500, which is up 211% over that time.