06 January 2012

Credit rating agencies – don’tcha just hate ‘em?

A credit rating is an analysis of the credit worthiness of an ‘issuer of debt’. A credit rating evaluates a person’s, an organisation’s, or a country’s ability to meet its overall and specific financial commitments, in value and magnitude.

Most of us have had some form of credit check done on us at sometime – some we know about, some we don’t.

Those we don’t can be triggered by commercial companies, rental agencies, individuals, pranksters or, occasionally, by mistake - I leave out malicious intent. An outstanding ‘debt’ sits like a ticking bomb to be triggered at the least opportune time – embarrassment, inability to complete tasks or transactions can engulf us.
One’s recourse is a phone call, a payment, or an inconvenient, protracted search for clarification, or vindication, or whatever. Successful or not, a traumatic experience.
Countries across the planet are now going through a similar experience.

There are three global organisations that fulfil the role of ‘assessing’ the ‘credit-worthiness’ of nations, transnational companies and global corporations – they have odd, household and aurally interesting names - Standard & Poor’s, Moody’s Analytics and Fitch Ratings all originating in North America.

Standard & Poor’s, although a seeming contrivance, is a ‘real’ name. Standard Statistics Bureau, founded in 1906 by Luther Blake, and Henry Poor, who published his first book in 1860, merged to form Standard & Poor’s in 1941, they were bought by McGraw-Hill in 1966. They have about 40% of the global ‘market’.

Moody’s was founded in 1900 as John Moody & Co, the company went to the wall in the stock market crash of 1907, arose phoenix-like in 1909. They have about the same percentage as S&P.

Fitch’s gestation followed a similar pattern; a publishing company founded in 1913, merged with a British company in 1997. Fitch acquired two credit rating companies in 2000, and the game was afoot. They are the smallest of the triumvirate.

These three companies all work in the same way – they charge issuers of bonds for a ‘rating’ from them, they also charge investors at the same time, they also assess ‘countries’ – Moody’s covered 3 countries in 1975, 33 in 1990, and over 100 by 2000 – they give ratings AAA, AA+ all the way to D! [who gets a D? And why?].

These three organisations were relatively unknown outside the financial world until the ‘global financial crisis’ of 2008-2009, or as some would have it, ‘the meltdown of capitalism’ - a series of events that not only pummelled the home-owners of North America, shattered banks and financial institutions across the globe, and generated a  wobble that nearly toppled us all into chaos.

The credibility of the trio of Credit Ratings Agencies has also taken a jolt. Their assessment of the so-called Collateralized Debt Obligations – CDOs screwed up. A company in America called Freddie Mac was given a Triple A rating by S&P and Moody’s as a mortgage lender in 2008 – this assessment has been designated by Time magazine as “both agencies granted AAA rating to CDOs that were chock full of  crap mortgages, thereby helping to precipitate the 2008 financial collapse”. The Washington Post said” Standard Poor’s didn’t just miss the bubble. They helped cause it.”

When called before the Senate Committee in 2008 all three credit ratings agencies said the same thing -  ‘Its only our opinion ......’, ‘ .........its not our fault if people follow our assessments .....’. The report of the Senate Committee, as articulated by the Chair Carl Levin, was that  the credit rating agencies of Moody’s, Standard and Poor’s, and Fitch were guilty of a catalogue of conflicts of interest, heedless risk taking and the failure of federal oversight that helped to push the country (USA) into the deepest recession since the Great Depression”.

In November 2009 the European Commission charged S&P with abusing its position of as the sole provider of international securities identification codes by requiring European finance firms and data sellers to pay licensing fees for their use.

On 11 November 2011 Standard & Poor’s made a mistake by cutting the Triple A rating of France; Portugal has also had issues with Moody’s in their assessment of that country’s, and their business’ credit rating leading to attacks by hackers on the CRA website.

The film Inside Job is a documentary that forensically dissects the GFC in the US and the parts played by banks, individuals and the triumvirate of CRAs and the ‘fall out’ – sad to say not an uplifting or triumphant vindication for the cause of justice, nemesis or ‘comeuppance’.

The nightly news attests to the ongoing, some might say slavish, far-reaching influence and reliance on the yo-yoing, and hypnotic, bounce of credit assessment – AAA = Good, AA+= uh oh; BB = Horror.

Quelle dommage! Ce catastrophique!

How? Why? Credibility? Credence? Audience? For these buggers!

Don’tcha just despair?

Doug Stewart is the Executive Co-ordinator (Community Relations) of the Annerley Branch

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