Why fear stalks the corridors of S&P and Moody’s
Imagine you went to a laboratory to see if the snake-oil you were just sold was any good….and when you got there, it turned out the snake oil was produced by the lab’s owner. Well, the ratings agencies are similarly independent. And as recent events show, bullets are flying in all directions as big business and the Fed seek greater control over what goes up or down.
Take Moody’s for starters. Until last year, its Senior Vice President William Harrington was in charge of some pretty serious stuff. Then they parted company (still not sure how or why, but I’m on the case) and now Harrington just lodged a 38-page belter with the SEC, damning his former employer as a mere creature of its own clients. I urge you to follow the link above: first of all it’s well-written and very funny in parts; and second, if only 10% of it is true, then the markets are even less of a level playing field than you thought all along.
Adding some Slog-sleuthing to Mr Harrington’s version, it’s also worth remembering that none other than Warren Buffet – Supreme Soothsayer of the Hathaway Galactic Empire – owns 20% of Moody’s. Mr Buffet came out strongly against rival agency S&P’s downgrading of the US from AAA two weeks ago; he didn’t declare the obvious interest he had in doing this, but then he got his the very next day when S&P promptly downgraded his company Hathaway.
None of which sounds exactly like what you’d call objective, it seems to me.
But S&P itself isn’t unscathed from the battle. A reliable source told me last Wednesday that the Fed remains hopping mad about losing its Triple A, and sure enough yesterday S&P President Deven Sharma was the recipient of a bullet in the brain…nothing whatsoever to do with Geithner of course, perish the thought. The replacement is a bloke called Doug Peterson, who works for Citibank…and has been an active promoter of US trade interests overseas for most of his career. Just to ensure that nobody got the wrong idea, S&P’s parent company McGraw Hill told the media that the agency’s ratings would continue to be ‘transparent’. Phew, that’s a relief. McGraw Hill earns most of its profits from….exporting books. So, not conflict of interest there then.
While talking to the media set by the way, McGraw Hill kept fairly shtum about the fact that its own shareholders want it broken up. I’d imagine William McGraw III doesn’t want that at all. Recently, the more voluble rebel shareholders told the Board that S&P’s ratings business should “appoint a well-known independent oversight figure to handle government relations, especially in light of the unit’s downgrading the United States’ credit rating to AA(PLUS) from AAA”. The Third McGraw promised publicly he’d see to this; and Peterson fits the bill perfectly: but we must hope that ‘oversight’ wasn’t being used in the UK-English sense of the word. (Deven Sharma, who has served as S&P president since 2007 and has no plans to pursue any other interests from roses to class action law suits, will step down on September 12. The Slog understands that he cried most of the way to the bank).
The first and most obvious thing to take out of this brief saga is, there is no such thing as an unbiased company, bank or sovereign rating. Nor will there ever be until ratings become a finance industry jointly-funded thing. There are two chances of that happening.
Now let me give you some inside track on what’s mainly going on here. During the financial crisis, Moody’s made some CDO calls so bad, most folks looking into things there reached the conclusion that lots of financial companies paid Moody’s lots of money to change Fs into As here and there. Hell – every f**kingwhere. I’m not clear as yet on William Harrington’s motives re this one, but suffice to say that a whistle is being blown suggesting that the agency was far too soft…..and misled the authorities. And five days later, Harrington has so far avoided being shot as he entered a Dallas police station. Hold that thought.
At the same time, we have S&P – Downgrader General of Governments – being thought too harsh by those very same Federal authorities. As a result of which, the boss man is replaced by another whose main hobby is pursuing US trade interests.
And finally, I am reliably informed via Washington that in the last fortnight, Justice Department and SEC investigations into both Moody’s and S&P have been stepped up considerably.
What all this represents is a volley of warning shots from a desperate American Establishment: ‘no more inconvenient downgrades fellas – or else’.