Downgrade for the ratings agencies?
13 Aug, 2011 00:15
They downgraded the US and added theatrics to the debt ceiling debate - but who are these ratings agencies?
They seem to wield immense power and influence over the global economy – a mere warning from one of them can rock markets, influence the debate by governments, with ripple effects that trickle down to individual citizens. But whose interests do they really serve? It was the downgrade heard around the world when Standard &Poor’s took the US from straight AAA student to one notch below for the first-time ever. Bad marks were handed down for the nation’s debt and politicians’ inability to agree on reining it in.“The US is becoming a bit more unpredictable when it comes to fiscal policy than the other sovereign countries we rate,” said David Beers, Global Head of Sovereign Ratings for Standard & Poor's.It’s a stoic response from the downgrader that helped ratchet up the theatrics of the debt ceiling debate, with the help of the other ratings agencies. At times, they stole the show from bickering politicians struggling with the debt deal. “They may be missing a larger concern because, there is growing evidence the US credit score is going to get hit within a couple of months,” said a Fox News report.Now that US has gotten hit, just how much does S&P’s mark actually count? Not much according to some, like investor Jim Rogers. But it’s not because the country isn’t broke.“America is going down the tubes,” said Rogers. “We’re the largest debtor nation in the world.”It’s because of the source.“These ratings agencies have been wrong about everything for the last 10 or 15 years don’t pay any attention to them,” ordered Rogers.So just how does the report card stack up for the major ratings agencies themselves?The are: S&P, Moody’s, and Fitch. Let’s assess. First test, the mortgage crisis of 2008.“These were the same ratings agencies that rated the toxic subprime debt triple a so how do we take them with any level of credibility after that,” questioned economist Mike Norman.Next test, the too big to fail banks and insurers during the financial crisis. “They missed many of the big bankruptcies they gave high investment gradings to Lehman to Bear Stearns right to the very end,” said economist Dean Baker. “AIG they gave a triple-A until almost the day it collapsed.”They gave good grades to firms that collapsed or were bailed out because of bad debt. In fact, the Financial Crisis Inquiry Commission reported: “The three credit rating agencies were key enablers of the financial meltdown.”This brings us to the next test: ethics. Ratings agencies are paid by the investment firms they grade. Also, Moody’s and S&P are publicly-traded which means they may be more driven to increase profits for shareholders.As investor Warren Buffet has pointed out though, the market requires it, because these ratings agencies have been around for ever, so they’re enshrined by government regulations.Regulations the ratings agencies have a stake in. Next test: objectivity.“Dodd-Frank financial reform has restrictions on ratings agencies and the rules are yet to be written and they care a huge deal what those rules end up looking like,” informed Dean Baker. “So it wouldn't surprise me if they were trying to curry favor with certain politicians.”In fact they’ve spent a combined total of $1.76 million dollars this year lobbying Washington over the regulations.This brings us full circle, to the downgrade of US credit. S&P downgraded the US because of the government’s debt. The administration ran up the country’s debt in part because it bailed out the Big Banks and AIG in 2008, because they were saddled with all of those bad mortgage bonds. Those were the ones the ratings agencies graded AAA, when in reality they were a “D” or an “F.” Makes you wonder if the the ratings agencies themselves deserve a downgrade.