Budget Deficit

Rater Haters Finally Find a Reason to Turn On Moody's, and It's a Bad Reason


That's what a BBB- rating looks like!

"You know someone or something is in deep trouble when the search for scapegoats happens in the middle of a crisis rather than after it has ended," Mish Shedlock says in a characteristically no-holds-barred survey of the various targets in the euro-meltdown witch hunt.

The one good thing about witch hunts is that they occasionally catch guilty people. In the trans-Atlantic war on prosperity, governments have finally settled on a common enemy: the investment rating agencies that have been downgrading government debt in Europe and the United States.

Olli Rehn, European Commissioner for Economic and Financial Affairs, says the agencies were "behind the curve and reinforced the curve." That sounds a little like grabbing yourself by the hair and holding yourself at arm's length, and it's typical of the illogical complaints being made by European leaders against Fitch and Standard & Poor's for their rapid downgrading of Greece's sovereign debt.

On this side of the pond, the Securities and Exchange Commission is putting pressure on Moody's, and Sen. Al Franken (D-Minnesota) is introducing regulation of rating agencies into the stalled finance bill.

Note that the rating agencies are not getting dinged in response to their legitimate failures—the famously too-high ratings awarded to Enron, Lehman Brothers and the universe of junk debt instruments. They're being punished for doing the right thing: sounding the alarm on Europe's manifest sovereign debt crisis and America's looming one. By coincidence, Moody's recently issued a widely publicized warning that the U.S. could be looking at a serious public debt emergency by 2013. No wonder Franken wants to rein in the raters that were considered jim-dandy back when President Obama first introduced his financial regulation bill. The agencies have gotten themselves into trouble by trespassing on government property.

Ironically, the raters have recently been making nice with government by applying a new standard for municipal debt that ups the weighting of historical performance and thus takes some of the heat off over-leveraged local governments. This is the standard Mark Twain applied to Wagner's music: "It's not as bad as it sounds." But what makes the scapegoating of the ratings agencies particularly rich is that their excessive power is itself a creation of government. The London Independent's Nihil Kumar explains:

The agencies weren't responsible for Lehman's investment decisions, nor did they pile all this debt on Greece's balance sheet. But how is it that despite being criticised in the recent past, a piece of research from one of their ilk triggers such worry in both dealing rooms and the corridors of power? The answer, many argue, is that the agencies are often backed up by the same governments they can unsettle by shuffling their ratings. In the US, New York University professor Lawrence White traces the rise of the agencies from John Moody's ratings of railroad bonds at the turn of the last century. His firm was joined by Poor's publishing company in 1916, and then the Fitch publishing company in 1924, the precursors of today's giants, with the three selling their views in thick ratings manuals.

The mid-1930s were a key marker. The US Office of the Comptroller of the Currency prohibited banks from putting money in "speculative investment securities" as determined by "recognised ratings manuals". This effectively endowed ratings with the force of law, according to Professor White. Other regulators followed suit and in the 1970s the SEC came up with a new category of nationally recognised statistical rating organisations, or NRSROs. From then on, NRSRO ratings were used to work out the capital requirements of broker-dealers, thereby entrenching the role of the agencies in the financial system.

These and other moves – in Europe today, for instance, ratings play a role within the Basel II framework of calculating capital requirements for banks – put the agencies on a "pedestal", according to Professor White. The key to curbing their influence is less, not more regulation, he says, arguing for the elimination of regulatory reliance on ratings.

And that's what a real austerity program looks like!

The political imperative seems to be moving in the opposite direction, however. In Europe, the push is towards more rules, as opposed to removing the agencies from the regulatory system. "That is a broader debate, which we should probably have but like a lot of things, is not being pursued at the moment," says Patrick Buckingham, a regulatory partner at the law firm Herbert Smith.

"There are too few agencies in too few hands," says Michel Barnier, European Commissioner for Internal Market and Services. "We'll work with the players of the sector to increase competitiveness." That is simply not true. The plan as of now is not to increase competitiveness but to put the "few hands" under tighter control by the governments they're supposed to be rating.

Of all the reasons to disdain ratings agencies, the Western governments have managed to find the bad one. To blame short sellers or S&P or hedge fund managers or "speculators" is to condemn your only friends, the people telling you to stop gorging, now, and go on a diet. The sovereign deadbeats could have saved themselves all this tsouris by taking the advice of that great economist and monetary policy expert Kate Moss: "Nothing tastes as good as skinny feels."

NEXT: What Would Joe Lieberman's Terrorist Expatriation Act Accomplish?

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  1. Gee, I guess I’ll start buying muni bonds now that they’re rated higher.

  2. I’ll have a picture of Miss Kate Moss in her underwear up on the tumblr blog shortly

    1. And that’s what a real austerity program looks like!

      Not if you are paying for the cocaine.

      1. You offering, dude?

        1. My mom is a big Fringe fan and bought me the first season on DVD for Christmas. I’ve only seen the first couple of episodes, but there was a scene where I thought of you. The crazy old brilliant guy (Walter Bishop) is on the phone with his son, who is trying to revive a woman who is in cardiac arrest. The first question the old guy asks is, “Do you have any cocaine?” The answer was no. If you were the character, the answer would’ve been, “How much do you need?” or, perhaps, “Will _____ work? It’s far more potent that cocaine.”

          1. THAN! Jesus, I have a major that/than problem.

            1. You have a lot of major problems. And frankly, if I had raw adrenaline lying around, I wouldn’t waste it on some woman. Fuck her.

              1. I guess that’s why you aren’t on the show.

  3. Yep, that’s the solution to all that ails the west: kill the messenger and replace him with a new messenger. Brilliant!

    1. Same as the old boss.

  4. I guess the problem is that the sole selling point of the Rating Agencies were that they could be trusted…and now we know they cannot be trusted.

    So who cares what they think?

    1. Danny, please, PLEASE write some new science fiction for us. PLEASE.

      1. What’s it worth to you? I will write on commission.

        1. It’s not worth that much, dude. It’s very difficult to put a price on lulz.

    2. I don’t need a rating service to tell me that government debt is a bad investment.

    3. yeah, wouldn’t it be nice if someone could start a new ratings agency and investors could opt to use it instead?

  5. Can’t control the message without some control over the messenger.

    I love pointing out to people the rating agencies in their current form are creatures of government. It kind of destroys their anti-free market rant.

  6. So who cares what they you think?


    1. Obviously you guys do since my every remark drives this place into histrionics.

      1. How does it feel to be king of the Trolls?

  7. I am sure that the New Improved Government Rating Agency? will be completely fair and objective about sovereign risk.

    *giggles uncontrollably*

    1. Racist! 😀

  8. As the European politicos turn their attention to places North Rhine-Westphalia (how does one say “Tea Party” in German?), people are gonna have to realize eventually that it’s about government bloat.

    And you can’t blame the ratings agencies for that. It wasn’t Fitch that created all that government bloat. Standard and Poor’s isn’t in charge Greece’s or Spain’s or Portugal’s Treasury Department..

    Blame your politicians. They’re the ones that took all your money. They’re the ones that squandered it. They’re the ones bailing out the people who squandered it–to the tune of $955 billion!

    …but don’t worry, the European Central Bank has promised it’s ready to buy a ton of that debt–so why worry?


    In the meantime–just like here in the United States–if you want to know who to blame for the bailouts, look no further than the politicians who created the bailout and voted for it.

    There’s no need to look at the ratings agencies to figure out who’s responsible for the bailout or who’s responsible for all that government bloat in the first place either…

    Even if the German and French politicians didn’t know how bad it was–they should have. That’s their freakin’ job. Everyone’s to blame for their own incompetence–that’s like the first day of Competence 101.

    How do you say “Tea Party” in German and French?

    1. “how does one say “Tea Party” in German?”


    2. There is no translation, it is Tea Party, because “Teefest” is kinda lame =)

      Funny thing, after the votes were counted in NRW, the chancellor (Merkel) actually said that all kind of tax cuts will be suspended just to 2013. She only ever so slightly oogles at the idea of an income tax reform….

      Now, if that isn’t “coincidence” I don’t know what is =)

  9. So who’s guarding the guards today?

    1. Nobody, like usual.

      1. Why are you so hateful?

        1. It’s Total Cynicism Monday at work.

          1. Followed by:
            -Completely Disbelieving Tuesday
            -Extremely Wary Wednesday
            -Utterly Scoffing Thursday
            -Contemptuously Skeptical Friday

          2. Followed by Utterly Disbelieving Tuesday.

          3. I’m holding out for Apathy Wednesday.

            Or I would be if I gave a crap.

            1. Nihilist Thursday
              Psychosis Friday
              Solipsist Saturday

  10. To blame short sellers or S&P or hedge fund managers or “speculators” is to condemn your only friends, the people telling you to stop gorging, now, and go on a diet.

    I imagine it’s more analogous to a drug intervention. When the addict’s best friends come in and tell him they’re taking him to rehab, how happy about it is the addict?

  11. Note that the rating agencies are not getting dinged in response to their legitimate failures — the famously too-high ratings awarded to Enron, Lehman Brothers and the universe of junk debt instruments. They’re being punished for doing the right thing: sounding the alarm on Europe’s manifest sovereign debt crisis and America’s looming one. By coincidence, Moody’s recently issued a widely publicized warning that the U.S. could be looking at a serious public debt emergency by 2013.

    “Does this dress make me look fat?”

    “N-n-n-nooo, Honey; you look totally sexy.”

  12. The solution is to bypass the rating agencies under the thumb of governments and paid by the sellers of this crap and have buyers employing their own rating firms.

    1. Then the feds will regulate the new rating firms too. Commerce clause, abacadabra!

  13. So, governments are gonna fix the rating agencies.

    I had my dog fixed. Same thing.

    1. Not quite.

      You can train your dog not to make messes on the floor.

  14. The addicts are running rehab.

    We’re in such deep shit here, it’s just not funny anymore – I read the FED has opened a credit window for Greece? WTF? Which printing press is that money coming from? Which bit of ‘We’re broke’ don’t these simpletons get?

  15. Iatrogenic disease.

    Not only does government regulation NEVER cure the problem, but it ALWAYS creates new and more virulent unintended consequences after each move.

    The rating agencies became an entrenched part of the regulatory Rube-Goldberg device back in 1974, with ERISA. Pensions were told to invest only in investment grade bonds, which necessitated an arbiter of quality. S&P, Moody’s and Fitch were granted authority but not accountability.

    (To be fair, the same was true in turn of the SEC, PCAOB, FASB, and auditors?)

    By the way, it was that very definition of investment grade that created the bright line at junk status, driving a price differential that actually originated the whole idea of CDOs in the first place.

    Of course, when the junk bonds supply ran out, the CDO machine merely shifted to mortgages and the rest, as they say, is history.

    1. Robert Arvanitis|5.10.10 @ 5:34PM|#
      new and more virulent unintended consequences

      Lately, I’m having serious doubts about how ‘unintended’ they are.

  16. I’m surprised, frankly, that it isn’t apparent to everybody that Greece can do nothing BUT default.

  17. Is our country really borrowing money from the Chi Coms to lend it to the EU?

    This will end badly, the only question is when.

    1. Don’t worry, China won’t be funding anything for much longer. Their ginormous real estate bubble will fix that.

  18. All your souvlaki are belong to us!

  19. Why do we never get an AA
    When we’re knocking at the door
    With a thousand billion dollars
    Spent on pensions, schools and war?
    ‘Cos when we stop and look around us,
    There is nothing that we need,
    In a world of speculation
    That is burning in its greed.

  20. This is silly, of course. Does anyone think that the hyper-sophisticated capital markets actually hinge on the word of a few dinosaur, late-moving ratings agencies, who simply INTERPRET market moves. The market players (non-suckers, tht is) ALREDY know whats going on.

  21. What’s the alternative if no one believes the rating services on government debt?

    The best alternative is to require governments to collateralize their debt, with say Athens Airport, or a couple of the Greek islands. Or even the Parthenon. It would make a good location for some shops and outdoor restaurants.

  22. Thanks for the info guys, i really did learn much from you.

    Tagged: bank comparisons

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