Paul Sweeney: Ireland’s sovereign credit ratings were cut for the second time in just three months on Monday 8th June 2009 because of concern about the soaring cost of bailing out the country’s ailing banking sector.
Standard and Poor’s has cut Ireland’s long-term sovereign credit ratings to double-A with a negative outlook. It was double-A plus. Ireland had lost its prized top-notch triple-A rating in March.
S&P also warned that Ireland could suffer further downgrades should the banking system deteriorate further.
But who are these rating agencies? They are private corporations whose bosses are paid in much the same way as the CEOs of most MNCs – by pumping up share (or other) values. S&P, Moodys and Fitches are the major ones and these are the same rating bodies that labeled junk loans as AAA rated. The buffoons in the banks, who should have know better, trusted these three agencies and bought vast sums of junk debts, paid much too much for it. Now and for many decades to come the taxpayers of the world bail out their mistakes. In the meantime, the rating agencies push up the price of money for us by cutting our countries’ ratings. Are they still getting it seriously wrong?
In the US, instead of being punished for their enormous economic crimes, S&P, Moodys and Fitches have been rewarded for bad behavior (just like the banks with state rescues). The US Federal Reserve will now only accept collateral for its Term Asset-backed Loan Facilities (TALF) if it has been rubber stamped by one of the major rating agencies, i.e. one of the Nasty Trio. This upsets seven other rating agencies which have been recognised by the US SEC.
A year ago, Securities and Exchange Commission (SEC) concluded that the Credit Rating Agencies failed to properly manage conflicts of interest in assigning top ratings to bonds backed by subprime mortgages and other assets. It set new rules for governing the credit rating industry after its probe into the three big agencies, Standard & Poor's, Moody's Investors Service and Fitch Ratings.
While any casual listener to RTE knows the names of at least two of the Trio, few would know the names of the other seven. We are so used to reverential homilies from the Stockbroker Economists and financial commentariat on radio, groveling to the supposed pearls of wisdom from the Nasty Trio Rating Agencies, that we all know at least two of their names (Fitches is less well known, being newer).
It is estimated, according to the Economist, that fees of around $400m will be paid to the Nasty Trio of Rating Agencies for work as the exclusive club of “advisors” to the TALF. The Inspector General of the US government’s bank rescue wants the US Treasury to stop using rating agencies and to undertake the screening of loans itself. But the era of privatisation and outsourcing to incompetent private firms lives on, yet.
Angel Merkel, not a radical, called for a European credit ratings agency to balance the dominance of Moody's and S&Ps. "Europe has developed a certain independence thanks to the euro" but "in terms of the rules, the transparency guidelines and the entire standardisation of financial markets, we still have a strongly Anglo-Saxon-dominated system,” she said - last year!
Various authorities in Europe have been highly critical of the role of rating agencies in the credit crisis - especially of their facilitation of the boom in complex structured bonds. The European Commission and other bodies have been working to push through legislation before the European parliament to curb them and regulate them. Credit rating agencies might be regulated in Europe by a single body. Ratings for debt granted outside the EU would be endorsed by an EU-registered credit rating agency unless the third-country rating complies with an "equivalence criteria", meeting the standards set by the EU legislation. Not before time.
But industry insiders are fighting against such regulation and are opposed to Brussels' plans for regulating the credit rating agencies, arguing that they threaten to bring in financial protectionism in debt markets!
Internal emails from the Rating Agencies reveal a lot. They show that the rating service employees knew they were acting fraudulently. Employees at Moody's told executives that issuing dubious creditworthy ratings to mortgage-backed securities made it appear they were incompetent or "sold our soul to the devil for revenue,'' according to e-mails obtained by U.S. House investigators. The Securities and Exchange Commission last year found the credit-rating companies improperly managed conflicts of interest and violated internal procedures in granting top rankings to mortgage bonds.
An e-mail that a S&P employee wrote to a co-worker in 2006, obtained by committee investigators, said, "Let's hope we are all wealthy and retired by the time this house of cards falters."
Here are emails from two unidentified Standard & Poor's officials which tell all. They are about a mortgage-backed security deal:-
“Official #1: Btw (by the way) that deal is ridiculous.
Official #2: I know right...model def (definitely) does not capture half the risk.
Official #1: We should not be rating it.
Official #2: We rate every deal. It could be structured by cows and we would rate it.”
And yet government officials in sovereign nations still quake in their boots when these punks (what else are they?) make a pronouncement on our economic health!
Why government officials should still be in such awe of these discredited Ratings Agencies today tells us much about the subservient, cap-doffing, attitudes that still prevail in high places of government. Instead of groveling, sovereign nations should cooperate together on rating debt and make Credit Rating Agencies history!
Paul Sweeney @paulsweeneyman
Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions. He was a President of the Statistical and Social Enquiry Society of Ireland, former member of the Economic Committee of the ETUC, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.
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