Business

Credit unworthy

Andrew Hook

Moody's? Fitch? Standard and Poor's? Not exactly household names. But these companies wield enormous power over all of us. All based in the US, they are the major credit ratings agencies that now dictate the fate, not just of individual business organisations, but of national economies as well. If, as we are constantly told , the 'markets' are the ultimate arbiters of any government's economic policy, the rating agencies are their enforcers.
     Greece, Portugal, Spain have all been plunged into economic turmoil because their credit ratings have been downgraded. Now Moody's, Fitch, and Standard and Poor's have moved on the rest of Europe. All European nations, we are told, are moving too slowly to bring down their national debts. In other words the rating agencies have come out on the side of the deficit hawks: the bringing down of public spending is more important than ensuring a fragile economic upturn is maintained.
     My question is this. Given that the decisions of these credit rating agencies can even occasion the kind of social chaos that we recently saw in Greece, why do we know so little about them? At a time when openness and transparency are fashionable buzz words, isn't it time that we knew a little more about Moody's, Fitch, and Standard and Poor's? Who works for them and what precisely are their qualifications? Are they accountable? If so, to whom?
     What one does know about them is not particularly reassuring. Given their job, one might have imagined that these agencies would be neutral, objective, totally detached from the financial world over which they adjudicate. Not a bit of it. They are commercial companies making money like all other business enterprises. Reliant on the big investment fund companies for most of their income, they are more inside Wall Street than outside it. In fact there appears to be a revolving door between those who work for the rating companies and jobs on Wall street itself.
     In recent days, thanks to the congressional investigative committee system in Washington, we've been able to learn a great deal more about Moody’s and company. The US financial crisis inquiry commission has been investigating the role of the rating agencies in the banking and financial crash of the recent past. Clearly there is much to investigate. The record of the agencies is not one that merits a high rating. Enron, for example, was being given sound, positive ratings within four days of its catastrophic collapse into bankruptcy. The Icelandic banks were allowed triple A ratings within weeks of their total meltdown.
     Perhaps most damaging of all, the whole complex structure of sub-prime mortgages – whose collapse precipitated Wall Street's and America's financial crisis – had been receiving positive ratings up to the last possible moment. Asked about this by the inquiry commission, the CEO of Moody's replied that he was 'certainly not satisfied with the performance' of highly-rated subprime mortgage loans – and in consequence his firm was working to fix the rating process. Rather late in the day, one would have thought.
     Moody's largest shareholder turns out to be Warren Buffet, one of the world's richest men. After its performance over the subprime market, even he agrees that the credit rating system is in need of reform. Even more revealing, however, are the remarks of Moody's CEO on the actual value and status of credit ratings. Credit ratings, he told the inquiry commission, are 'not a buy, sell or hold recommendation' – clients should do their own homework before making a decision.
     What then exactly are they? And why should anyone pay much attention to them? Perhaps George Osborne et al should ponder these words before boasting that the credit agencies' views on the scale of European national deficits proves that their policy of slashing public spending, no matter what, is the right one.

Andrew Hook is a former professor of English literature at
Glasgow University