Rating Agencies Capitalized on the Debt Ceiling Fiasco
Now, as anticipated, a debt ceiling agreement has been reached and the wait is on to see whether the major rating agencies — Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings — will reaffirm or downgrade the US’ triple-A status.
A credit rating downgrade any time in the near future seems unlikely. Instead, Liz Peek at The Fiscal Times suggests the ratings agencies have simply been exploiting the debt ceiling drama in an opportunistic media push to regain some credibility after their many blunders, just a few of which are highlighted below.
From The Fiscal Times:
“Their role in aiding and abetting the purveyors of the now-infamous CDSs and CDOs, by providing unwarranted triple-A ratings, was not the first in which Moody’s and S&P had been caught wrong-footed. Both companies had failed to unearth the chicanery at Enron and WorldCom, for example, though a small rival named Egan-Jones had blown the whistle on those companies before they went under…
“…Criticism of the ratings agencies is not confined to our shores. In the past several weeks, monetary authorities in Europe accused the firms of “bias” after Moody’s downgraded Portugal’s debt to junk status. European Commissioner President Barroso suggested that the EU should begin looking for alternative sources of guidance for their debt, and was quoted as saying “We must break the oligopoly of the ratings agencies.” Other observers noted that, as usual, the agencies were actually behind the curve on spotting the deterioration in EU debt; the credit default swaps markets had forecast the slide months earlier.
“For all these reasons, there is ample incentive for Moody’s and S&P to try to get ahead of the U.S. looming debt crisis. Despite their history, their input has been welcomed — treated as oracular, even — by our political leaders. For both sides in the debate, alarm bells rung by the agencies have served a purpose. It has allowed President Obama to chastise the GOP for not responding to the gravity of the debt crisis; at the same time it has allowed Republicans to press their case for spending cuts. Unhappily, unless the two sides in this debate emerge from their bunkers and manage to fashion a meaningful compromise, the ratings agencies may well have to follow through and downgrade the nation’s debt, conceivably costing taxpayers hundreds of billions of dollars in higher interest on the federal debt in years to come.”
The ratings bias Peek discusses is readily apparent… toward the companies that pay for ratings, a clear conflict of interest, and, of course, toward the US. (Also, arguably against Chinese debt.) The US bias likely stems from the fact that this nation’s very own Securities and Exchange Commission decides which rating agencies qualify for status as a Nationally Recognized Statistical Rating Organization (NRSRO), an essential designation for making a credit rating agency relevant to investors.
Of course, whether the manipulation even matters is another question entirely. As Quantum Fund co-founder Jim Rogers recently suggested, the US has already lost its AAA status among sophisticated investors. Ratings agencies have been drumming up attention so as to not be late, again, to the downgrade party… but this party’s already long over. You can read more of Peek’s opinion in her Fiscal Times piece on how rating agencies are exploiting the debt drama to regain trust.