Tuesday, January 17, 2012



When Stalin said,” it is not important who votes, what is important is who counts the votes” he understood perfectly the role of rating agencies.

In today’s world, a handful of rating agencies have the monopoly on determining what is triple AAA and what is triple CCC. Once again the general public accepts unquestioningly these ratings as if they were the financial equivalent of The Ten Commandments. 

Politicians scurry away from the rating agencies findings like scalded chickens, finance ministers and central bankers engage in slanging matches like schoolchildren, saying it is not me but my neighbor who should be downgraded, Eurocrats and others say that the rating agencies should be barred from down grading countries during difficult times. It is almost as though Orwell’s Ministry of Truth is alive and well and living in Brussels

So who are these hitherto relatively unknown organizations, why do they wield so much apparent power, and why is it only now in extreme financial crisis that they are being taken seriously?

The main rating agencies are Standard & Poor’s “S&P”, Moody’s and Fitch Ratings. Their role, in extremely simplified terms, is to evaluate Bonds and other securities and evaluate independently the level of risk of each security. This should make the market more transparent and efficient as investors can readily assess whether to invest at all and/or which investments should carry a higher risk adjusted interest rate.

Between them the Big 3 provide ratings for most of the securities freely traded around the world, and such is the “credibility” of these organizations that major institutions such as insurance companies and pension funds follow more or less blindly their ratings. Thus huge capital in/out flows results from an up or down grading, leaving countries and companies alike potentially unable to raise finance.

Given this enormous power, these agencies like Caesar’s wife should be above reproach, but regrettably this has not proved to be the case in the recent past. A non exhaustive list of what many would describe as their grossly negligent shortcomings / blatant conflicts of interest include:

  • Being too close to the management of client companies e.g. .Enron (Bankrupt)
  • Being too close to Government agencies e.g. Freddie Mac & Fannie Mae (Bailed out)
  • Having ownership structure not conducive to independence (Listed parent Co)
  • Leaning on clients for other business using the rating as blackmail (Hannover Re)
  • Operating as a de facto Cartel (Chinese Government established own Agency to escape)
  • Rating structured products AAA which at best  were BBB (Subprime crisis + AIG bail out)
  • Being in bed with Wall Street and an indirect instrument of US Government policy

It is clear that when two American agencies Moody’s and S&P stand together they own over 80% of the market and for a Sovereign Government out of favor with  US foreign policy, watch your back, perhaps your debt may get down graded by a completely “independent “ agency.

Interestingly, for all the colossal losses resulting from rating agency actions, or more importantly lack thereof, I am unaware of a senior executive who has lost their job or is being prosecuted.

They are therefore yet one more branch of the US financial aristocracy who de facto are above the law.

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