Why discredited and disgraced ratings agencies continue to be taken seriously is one of the sublime mysteries of the post-GFC world.
On Wednesday, NSW Treasurer Eric Roozendaal joined another state Labor Treasurer, Queensland’s Andrew Fraser, in justifying privatisation by warning that agencies might have downgraded their ratings of NSW. Admittedly, Fraser at least managed to sell off his assets; NSW Labor has sold a half-arsed, pig-in-a-poke version of its electricity assets, and got two bob for them.
There are many good reasons for privatising government assets in the right circumstances, but appeasing the screen jockeys at ratings agencies is never one of them.
Standard and Poor’s, Moody’s and Fitch Ratings share direct culpability for the GFC and, despite some window-dressing of internal reform and promises from regulators to get tough, they remain in essence the same conflicted, error-prone outfits that helped inflict the financial crisis on the world.
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This week, Standard and Poor’s and Moody’s welcomed the removal of Tunisian dictator Zine El Abidine Ben Ali by downgrading Tunisia’s credit rating. You might call it democracy, but at the ratings agencies, it’s just sovereign risk.
Closer to home, this week Fitch Ratings seized on the Queensland floods to continue the campaign it started last year to undermine the Australian housing market. As Glenn Dyer showed at the end of September, Fitch pulled the astonishing stunt of claiming it had been repeatedly asked to “stress test” the Australian property market over fears it was highly over-valued.
Dyer summed it up best when he asked who, given the agencies’ records, would take seriously the results of any such “stress test” anyway?
On Tuesday Fitch was at it again, declaring that property values in Queensland might be “permanently adjusted downwards” because of the floods. At least this time the journalist concerned found a variety of more informed commentators to either modify or contradict Fitch’s contention.
A legal action against Standard and Poor’s launched after the GFC is also continuing in the Federal Court. In 2009, financial services company Local Government Financial Services was sued by 12 local councils over ”constant proportion debt obligation” notes from ABN Amro they had invested in, which had been AAA-rated by Standard and Poor’s. The notes eventually returned ~7% of their value, and LGFS has itself sued ABN-Amro, and S&P over the rating. LGFS chief executive Peter Lambert told Crikey that recent mediation efforts had been unsuccessful and the case was now proceeding.
The CPDO rating was just one of many product ratings from ratings agencies that turned out to be deeply problematic, either because of errors made by ratings agencies or because of conflicts of interest in agencies that stood to benefit from its lucrative relationships with the banks offering products for ratings.
A similar CPDO derivative was at the heart of a remarkable error by Moody’s European arm in 2006. In 2008, the Financial Times revealed that an error in Moody’s computer models gave a AAA rating to a CPDO, when it should have been several rating notches lower (Standard and Poor’s had also rated CPDOs at AAA). Problem was, Moody’s discovered the error in early 2007, but left the rating at AAA until 12 months later when, in the midst of the GFC, it downgraded the rating.
This was a deliberate decision by Moody’s, based on concern about what admitting the error might do to Moody’s reputation. As one Moody’s executive put it:
In this particular case we seem to face an important reputation risk issue. To be fully honest this latter issue is so important that I would feel inclined at this stage to minimise ratings impact …
Moody’s later claimed that the committee that took the decision to keep the AAA rating broke the company’s own rules and it told the US Securities and Exchange Commission that it “will not forbear or refrain from taking a rating action based on the potential effect (economic, political or otherwise) of the action on Moody’s …” — despite the fact that it did exactly that.
What was the response of the SEC? Despite its investigation concluding the SEC had the power to prosecute Moody’s, it elected simply to “caution” Moody’s and other agencies that it might prosecute “fraudulent misconduct” in the future.
Remember that next time a politician invokes ratings agencies as the rationale for major policy decisions.