How did a bunch of unelected corporate suits get the power to wreck the global economy?

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Yesterday, I taped an interview with Canadian TV, where the question of the rating agencies came up.

I stated my long held views about them: That they were a prime enabler of the credit crisis; that they were one of the most corrupt institutions in the United States, and had sold their ratings to the highest bidder. That their senior executives were criminally liable and deserved jail time. That S&P, Moody’s and Fitch themselves deserved to be executed — the same corporate death penalty that Arthur Anderson received. I stated I was perplexed as to why they were not put down like rabid dogs.

So with that modest position, you can imagine how pleased I was to see Zachary Karabell’s piece this morning in the Daily Beast:

“As the debt-ceiling storm intensifies, some reports indicate that the White House, and perhaps the global financial markets, are less concerned with paying bills after Aug. 2 than with credit-rating agencies imposing their first-ever U.S. government downgrade, from AAA to AA+.

How did it come to this—that a trio of private-sector companies could wield such enormous influence? More specifically, a trio that has proven chronically behind the curve, analytically compromised, and complicit in the financial crisis of 2008–09 as well as the more recent euro-zone debt dilemmas? Somehow, these inept groups again find themselves destabilizing the global system in the name of preserving it . . .

Yet here they are again, threatening to downgrade the debt of the United States—potentially costing taxpayers hundreds of billions, again, in the form of higher interest payments—because they don’t like the messiness of the political process and they don’t approve of the level of debt relative to GDP, so said David Beers of S&P.

But, really—and I mean this in the most respectful way—who the hell is David Beers and who elected him to be the arbiter of the American financial system?”

This issue here is not the debt ceiling or the ongoing deficits — but rather, yet another corporate criminal allowed to roam free.

The entire piece is well worth your time to read.

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Note: You can read my previously run ins with S&P’s parent company McGraw Hill here.


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Source:
Debt Police Go Rogue
Daily Beast Jul 27, 2011 11:40 PM EDT
http://www.thedailybeast.com/articles/2011/07/27/debt-ceiling-unaccountable-credit-ratings-agencies-go-rogue.html

See also:
U.S. Default: Robert Reich Calls S&P Warning About U.S. Credit ‘Height of Hubris’ (ABC)

Category: Analysts, Bailouts, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

33 Responses to “Rating Agencies: Debt Police Go Rogue”

  1. ilsm says:

    Wiretapping, scandals by NGO’s………………………

  2. rktbrkr says:

    You don’t think the US will pull their punches regulating these agencies if the US AAA rating is at risk do ya?

    First we had our pants down to our ankles for the TBTF now the rating agencies get sloppy seconds.

  3. b_thunder says:

    The only reason the rating agencies still exist and have not been sued out of the existence is b/c the US Government protected them! and this is a the payback? i’m not a lawyer, but it seems to me it won’t take much for the US AG to open an investigation in their practices. And if that happens, i doubt David Beers will remain at S&P much longer

  4. louiswi says:

    Kudos to you BR for bringing this to the forefront.

    …How did it come to this?… Armed with the slogan, “fake it ’till you make it”, these outfits pretty much got there by their own declaration as do many “experts”.

  5. dead hobo says:

    BR,

    I’m a little confused here.

    You don’t like the ratings agencies when they ignore their responsibilities and allow criminal conspiracies involving debt to flourish with their tacit stamp of approval.

    You also don’t like the ratings agencies when they finally start doing their job and rate debt.

    It comes across as loving the punchbowl, but blaming the bartender for both your hangover and your visceral need for the next drink.

    ~~~

    BR: I found it ironic that the rating agencies are so involved in castigating the US for a budgetary mess that they, the rating agencies themselves, were so crucial in helping to create.

  6. gloeschi says:

    Gosh, I feel myself forced to defend rating agencies here… Admittedly, rating agencies are usually behind the curve. But isn’t there a risk the politician-bank-lobby mafia uses those short comings as an excuse to get rid of the rating agencies for good? Government couldn’t be happier to dive deeper into debt without any pesky agencies warning about debt levels (and I doubt newly formed rating agencies would supply the public with their ratings for free). Also, the ABS and MBS disaster – can it really be blamed on the rating agencies? Rating a structured product is not like rating a company (which has revenues, customers, suppliers, actual products etc). As far as I understand it, banks graciously”supplied” rating agencies with their models on valuing structured products. Rating agencies were complicit – but what to you expect from a business model where the judge gets paid by the subject under scrutiny? Just be careful what you wish for (if your wish is the destructing of the established rating agencies).

  7. FS says:

    @hobo

    I think the point is that the agencies have no credibility-the statement that “they’re finally doing their job”
    is off point. They (like our politicians) have been wrong so much, they should have no say in the matter. Their
    certainly does need to be a system in place to monitor/evaluate/rate, but these agencies have already
    proven they are not up to the task.

  8. dead hobo says:

    FS,

    At what point should they START doing their job? Wall Street likes the idea of ratings agencies, but not if they actually rate debt? You think they’re getting all uppity when they finally start doing their job?

    Perhaps they should just go out of business, since Wall Street has proven itself so capable of managing its own affairs. The efficient market hypothesis appears to be both ridiculed and worshiped, depending on the mood of the writer and if profits are at stake at the moment.

  9. Bruman says:

    What the agencies did with asset backed securities was horrific, and there does need to be a re-evaluation here.

    But I never got the sense that the traditional bread-and-butter corporate and sovereign credit ratings were all that corrupt and inept. The incentives are different, because I corporation can’t just dissolve itself, reconstitute itself, and try again, the way they can with SIVs. Giving an SIV a bad rating means saying goodbye to dozens or hundreds of opportunities to rate future SIVs from the same company. Giving a company a bad rating doesn’t necessarily mean that no other company will ever pay them to rate.

    Yeah, the ratings agencies are slow, and usually behind the curve, but as long as investors already know that and do their own homework (as they are supposed to), it shouldn’t make a huge difference. The only real power that ratings agencies have is when they change ratings to things that create legally forced selling. Like from investment grade to non-investment grade.

    With US Treasurys, the challenge is that money market funds hold them for the AAA rating, and if they go to AA+ or something, then they have to find something else to make up the minimum quantity of AAA. But that’s just a feature of the current system. I don’t see any evidence that they are doing this out of spite or ulterior motives? Do you have evidence that I’m missing on that score?

  10. Bill Wilson says:

    The ratings agencies are a poor substitute for due diligence. Thanks to the current problems in the U.S. and Europe, I think it’s possible that many institutions will be forced to ignore the ratings agencies rather than sell downgraded debt. Why are money managers being paid to build an investment portfolio based on some third party’s ranking system? It’s a foolish way to do business.

  11. Mike in Nola says:

    They are doing the Big-O’s bidding. He wants to cut SS and Medicare and they can panic people into doing it.

    Probably a handshake deal from awhile back to protect them as long as they helped out.

  12. Bruman says:

    BR said: “I found it ironic that the rating agencies are so involved in castigating the US for a budgetary mess that they, the rating agencies themselves, were so crucial in helping to create.”

    That is ironic, although I find the banks more guilty of this than the rating agencies. The rating agencies are at least supposed to assign ratings based on forward-looking analysis. Rick Santelli having hissy-fits about how horrible the debt is, given how much of it was used to save the likes of his butt turns me off even more (admittedly, he’s not a banker, but he’s more or less a spokesperson for many of them).

  13. If they were behind the curve then why aren’t they behind the curve now? In other words, people shouldn’t be complaining about the impending downgrade. They should be glad it hasn’t happened yet and the US government has had a pass up to this point. I suppose if the ratings agencies were truly doing their job the US would be down to AA by now.

    So lets cut to the chase. These guys have got the US government’s panties in a knot. There is really only one thing left for the government to do. What they usually do at this point……INVADE!

  14. whskyjack says:

    The problem is we are discussing isn’t the rating agencies doing their job, instead it is about their making threats for blatant political motivation. Their job isn’t to influence public policy, Their job is to rate the bonds. Which they should do with a short explanation then STFU.
    In reality the ratings agencies are only useful broad based tools for bonds that most of us don’t follow. In the case of the US treasury notes I believe everybody can find enough public information to make their own ratings. If you look at the current interest rate, it would appear that people are doing just that despite all the blustery statements being slipped to a gullible press.

    Jack

  15. gloeschi says:

    Maybe in the end we will have to rely on that Chinese rating agency (“Dingdong”?). Those who believe Sloppy&Poor, Cranky’s and Glitch are not prone to heavy political interference when it comes to sovereign ratings live on a different planet. FT’s Alphaville (“Greek government hypocrisy, Fitch edition”, May 20, 2011) revealed the interference of Greece resulted in an “improved” rating. And who could forget Lieberman’s threat to dissolve the FASB unless they abolished mark-to-market?

  16. Stuart says:

    This is a critical yet inexplicable point. That these rating agencies, corrupted by greed, enablers of much of the ABS crisis, that the Sr. Execs responsible seemingly immune from prosecution – they were clearly guilty of fraud, now have the power to wreck havoc on the world financial markets, again. Are you kidding me?? Off with their heads. Seriously… you get caught knowingly rating garbage as triple A because you didn’t want to miss your cut of the deal?? Sorry, your forfeit all credibility and because of the deliberate, purposeful deceit involved…aka fraud, you go to jail. Do not pass go. Do not collect $200… you go straight to jail. Yet, they now hold the US Govt, the same Govt that could’ve enforced criminal charges, hostage to higher rates and after abdicating any integrity in the ABS crisis, now threaten to downgrade Uncle Sam. You couldn’t make this stuff up…

  17. arrian says:

    > I found it ironic that the rating agencies are so involved in castigating the US for a budgetary mess that they, the rating agencies themselves, were so crucial in helping to create.

    It may be ironic, but it doesn’t change the fact that we have serious fiscal issues that require a long-term solution. Whatever the rating agencies failings, they help shine a light on this. Karabell’s statement:

    “because they don’t like the messiness of the political process and they don’t approve of the level of debt relative to GDP, so said David Beers of S&P.”

    is a little off the mark. I don’t think there are a lot of people right now who have much faith in the “messiness” of political process, let alone the “solutions” being proposed. If Karabell finds something to like in this, he has extraordinary faith.

  18. readerOfTeaLeaves says:

    What ‘Stuart’ said.

    If this were fiction, no one would believe it.

  19. socaljoe says:

    The rating agencies are relevant only to the extent that investors choose to heed their ratings.

    Investors are free to choose which of several rating agency to use or to do their own research.

    It seems to me the important question before us is what is the quality of US debt, not the degree of influence ratings agencies have.

    Are we castigating the messenger because we don’t like the message?

    Funny… no one complained for decades when US AAA rating was not in doubt.

  20. dead hobo says:

    BR: I found it ironic that the rating agencies are so involved in castigating the US for a budgetary mess that they, the rating agencies themselves, were so crucial in helping to create.

    reply:
    ————-
    Woulda Coulda Shoulda. Ironic? So What? Who else is available? GS? Do you just want them to just stand aside and let the market manage itself? Your comments read like you just want them to go away because credit agencies that actually try to rate debt are bad for business. You sound like you liked them better when they were eunuchs, and want what they appear to be growing to atrophy and ascend and they should go back to singing soprano. .

    Stuart, yes, they’re crooked and many who manage the agencies belong in prison. That being said, what is the alternative? Life isn’t fair, government favors some more than others, crooks get away with it sometimes, bad people sometimes do good things. The crooks are institutionalized now.

  21. willid3 says:

    maybe if the government paid the ratings gang, they would rate the bonds higher? its how they seem to work. pay for play, sort of like that music scandal from the 50s and 50s.

  22. Equityval says:

    Slow news day I guess. Karabell’s piece is stupid. Does he want the agencies to call a spade a spade, or not? The rating agencies should have been more scrupulous with mortgage paper but are now supposed to look the other way when faced with deficits equal to 10% of GDP and a rapidly rising debt position – is that what he thinks? So apparently the answer is shoot the messenger. Thank goodness Arianna didn’t pay him anything to write that drivel.

    I’m going to go out on a limb here and guess that Zach is in the Krugman camp of believing that we ought to spend ourselves into a state of penury, and that these good for nothing rating agencies now have the temerity to call BS on that strategy and gum up the works. I guess it’s a bitch to find out that your sh*t stinks too, but our structural deficit is as bad a Greece’s – them’s the facts. We just get to print our own currency, they don’t.

    Final thought, if the rating agencies are so inept and corrupt, why do we even care about them? Shouldn’t they just be ignored? Wasn’t Barney Frank in charge of fixing that and eliminating their influence over investment decisions? How’d that work out?

  23. willid3 says:

    he only reason they exist is because you can’t trust the sellers of ‘assets’ or the buyers either. since today’s world has lots of pensions funds, banks etc that have to have high grade assets. and in some cases (that mark to fiction that banks are doing) its not working. and we know the sellers make use car salesman look positively stellar citizens in the community

  24. carleric says:

    I find it both incredible and funny that anyone with a brain bigger than a pea supports the rating agencies based solely on their past performance. Why would you expect them to do their job better now. Their business plan differs not one iota from your basic Philadelphia street corner hooker…”Take the money and do what you are asked to do”. And you expect a different outcome this time?

  25. carleric says:

    What is this “Your comment is awaiting moderation” crap…either the comment section is available for comment or it isn’t.

    ~~~

    BR: It means that based upon a variety of inputs, your comments require adult supervision. This comment confirms the wisdom of that algorithm

  26. contrabandista13 says:

    Yes, we have noticed the reliability of the rating agencies throughout the years, there is a public record that demonstrates their diligence….. What is really incredible is that anyone would cite them as reliable, and that is truly dishonest…. What….? Were we supposed to forget…?

    If I were the dictator, I would have my thugs give them a good beating….

  27. DeDude says:

    Rating agencies are not taking about “potential” downgrade of US debt because of this debacle – they never based ratings on reality, it was always payola. They are trying to blackmail the administration to stop implementing the reforms that would take away the legislated importance of ratings.

  28. DeDude says:

    The only true ratings are the prices of credit default swaps on an open exchange. There the “rater” get to put his money where his mouth is – and that will keep any corporate kleptocrat honest. If those ratings turn out to be wrong, at least they were wrong for the right reason – and the pain will be shared with others than just the taxpayers.

    Now give me the name of all the AAA rated paper that has CDS prices above the US treasuries. Then we can discuss whether or not the threats to downgrade is an honest rating issue or blackmail.

  29. Sechel says:

    This from firms that only today messed up the ratings on a 1.5 billion dollar commercial deal. First over-rating the deal and then pulling the ratings after the kerfuffle became public

  30. M says:

    I think there is something to the idea that the downgrade has a political/philosophical angle rather than a purely “statistical” or fundamental basis.

    Honestly, what are the odds that US bonds will default any time soon? Will raising the debt ceiling at the last minute (just SNAFU) change the reality that the USA will pay its bills?

    My gut feeling is S&P are unhappy with Dodd-Frank and other changes. It seems there are some atmospherics. The NRSROs (and S&P in particular) still seem to feel put upon. Having been completely absolved by the SEC for their non/maleficence doesn’t seem to have been enough. In return for the insult of looking at them funny they threaten a downgrade. There’s a moral here: letting a crook win doesn’t usually cause them to convert to the side of goodness and light. It just encourages them to cause more havoc.

  31. [...] even more apt description from the Daily Beast (h/t Barry Ritholtz): …. frankly, the power of their agencies is the product of endless buck passing: first on the [...]

  32. Francois says:

    Lest my memory is totally FUBAR, Bernanke and the criminal syndicate had a non-negligible role in protecting these bandits; Fed Res peremptory declared that ONLY the Big Three were valid raters of a wide swath of institutional debt.

    This declaration took place in 2009, after the beginning of the crisis.

    How much did the rating agencies paid/promised to have their collective asses saved like that?

    One day, justice may prevail again in the Home of the Slave, Land of the Fee.

  33. [...] Remember, the big 3 government-sponsored rating agencies routinely took bribes as their normal business model, committed massive fraud which greatly contributed to the financial crisis, covered up improper ratings after the fact, and otherwise sold their soul (in their own words). And see this and this. [...]