Moody’s Blues

Are we at the mercy of the credit ratings agencies? We’ve watched how downgrades of creditworthiness of some of the lesser European Union members has dragged the rest of Europe into an unpleasant economic decline that’s beginning to undermine the recovery and look a whole lot like a full blown recession. The EU did have a choice – one they have not made because it increases the burden on the mainstays of the EU “euro” nations (France and Germany) – to issue a never-before “euro bond” at a reasonable rate, guaranteed by the Union itself, and then to provide this capital to the unsteady economies like Greece, Spain, Ireland, etc. to lift the latter out of their current 10-14%+ borrowing rates. And when they didn’t, the markets tumbled to the darkest depths we have seen since 2009, when the market showed us how far it could fall.

Earlier, this month, one agency decided that the United States needed a downgrade as well – warning of increasing downgrades if sense and reason do not return to economic governance. Standard & Poor’s, the only major agency to impose this lowered AA+ rated on the U.S., held to this downgrade, even after acknowledging a $2 trillion miscalculation, saying: “The downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenge.” The markets have been in a yo-yo movement – mostly down – ever since, and S&P rubbed salt in the gaping wound it opened by downgrading the investment portfolios of state and local governments that hedged with U.S. Treasuries: “S&P cut its rating of [Los Angeles, CA’s] general investment pool to AA from AAA. It also downgraded dozens of other municipalities with large investments in U.S. Treasury notes.” Los Angeles Times, August 18^th. Ooooh. LA removed S&P from the list of acceptable ratings agencies to rate their municipal bonds.

This trickle-down of negativity wasn’t relegated to S&P: “The Moody’s review, which put five states and 161 AAA-rated local governments on the negative-outlook watch list, found that Massachusetts was second only to Virginia in the number of communities at risk, largely because both states’ economies are highly dependent on federal spending.” Boston Globe, August 9^th. With austerity, the dish best served cold, as the only item on the federal menu, guess what the credit rating agencies think this means for so many state and local governments?

But wait, weren’t these rating agencies the same ogres who were paid by the big Wall Street investment firms to assign AAA ratings to sub-prime mortgage bundles, one of the major factors that encouraged the over-borrowing that tanked our private sector? I continue to be staggered by the fact that we still let financial institutions and other large-scale borrowers (governments, corporations, etc.) pick which rating agency they will use to rate a new debt issuance. Why would anyone pay an agency with a reputation for being tough and fair on such assessments over an agency that “will play ball”? This is a flaw in the system that you could drive a truck through… hell every truck in America! The agencies, under scrutiny from the government and involved in litigation over this subject, rage that they were/are always honest and fair. Easter bunny time!

Well, maybe this little exposé in the August 19^th Washington Post will set you straight: “In an 80-page letter to federal regulators, a former Moody’s senior vice president says the firm systematically squelched its analysts’ private doubts to keep deals and profits flowing… Moody’s managers intimidated analysts who stood in the way of favorable ratings, and its compliance department harassed employees who took an independent stand, according to the former analyst, William J. Harrington…According to Harrington, a fundamental conflict of interest permeated the firm’s culture: Like other credit rating agencies, Moody’s is paid by the very companies whose securities it is supposed to grade objectively…

“‘The goal of management is to mold analysts into pliable corporate citizens who cast their committee votes in line with the unchanging corporate credo of maximizing earnings of the largely captive franchise,’ he wrote… Repeatedly, Moody’s management ignored internal warnings that employees responsible for rating securities backed by home mortgages were ‘pumping out worthless opinions,’ he wrote.” Moody’s, of course, denied the allegation and responded with their “highest integrity” card. Whom do you believe? And why exactly, has our Congress failed to deal with regulating this obvious flaw in the system? Instead they cry that “regulations are job-killers.” Exactly how many jobs did these credit rating agencies kill by helping to tank the entire American… er global… economy? Can’t we at least get a couple of indictments out of this behavior?

I’m Peter Dekom, and there goes the “screw common sense, because I have a better-sounding, catchy-if-totally-inaccurate slogan that will get me re-elected” factor that has undermined confidence in the entire system.