In late December 2015, the US Securities and Exchange Commission (SEC) announced the publication of its «Annual Report on Nationally Recognized Statistical Rating Organizations». The commission produces such reports every year, as required by the 2006 Credit Rating Agency Reform Act. In the industry these documents are simply known as rating agency reports. The SEC provides details on ten nationally recognized statistical rating organizations in the US, including the three market leaders – Standard & Poor’s Ratings Services, Moody’s Investors Service, and Fitch Ratings.
It now seems certain that the financial crisis of 2007-2009 was ignited not only by Wall Street banks, but also the Big Three credit rating agencies, which deliberately doctored their assessments of mortgage and other securities, contributing to the creation of a huge bubble in the US financial market. These Big Three agencies are directing today’s financial markets, and government financial regulators cannot keep them in check.
In the ten years since the law to reform the credit rating agencies was passed, none of the flaws in the way they work have been corrected. Among other problems, rating agencies completely lack transparency. It is difficult to even identify their biggest shareholders (most experts concur that their ultimate beneficiary is the Rothschild family). The machinations involved in the drafting of the ratings are equally opaque. The assignment of ratings is not open to outside observers.
Perhaps the most important flaw in this system is that often the agencies operate under an «issuer-pay» model, in which the agency provides an assessment for a client who wants a rating for his company (bank) and/or a security issued by that company (bank). In the SEC’s reports this flaw is called a «conflict of interest». Speaking bluntly, it is corruption, pure and simple. A higher rating is directly contingent upon the amount of money the agency receives from its client. This is a criminal conspiracy, in which each agency receives its share of the «swag» when the client makes some speculative deal. There are several variations of this scenario.
In the first, one of the market players uses an agency to «commission» a rating for its rival, for a set payment. The agency plays the role of an economic assassin. In the second scenario, the client for some reason decides not to use a rating agency’s services. Then the agency proceeds on its own to assign that client a low rating. This is an ordinary case of revenge. In the third variation, an order for a negative rating comes down from «above» and carries political connotations. The Big Three do not only serve Wall Street banks and other envoys from the financial capital, they are also at the service of the US government. In a way their credit ratings are a form of economic sanctions.
All the players in the financial markets are either directly or indirectly dependent upon their ratings, even if they have never had any direct contact with the Big Three agencies. The international capital adequacy standards for banks, known as the Basel Accords, are a good example (the third generation of those standards, Basel III, is currently in the process of being implemented). The quota of a bank’s minimum required capital is calculated with due account for the securities in the bank’s portfolio, the value of which is appraised with due account for the ratings assigned by the Big Three.
Scandals occur just as often within the rating agencies as within their partners, the Wall Street banks. One of the most notorious episodes took place in August 2011, when the US Securities and Exchange Commission received a letter from William Harrington, a former senior analyst at Moody’s. That letter was actually a detailed analytical memorandum exposing the inner workings of that agency. Harrington confirmed that that agency is utterly dependent on its clients, or more specifically – on the money they offer. He acknowledged that ordinary analysts as a group try to be objective, but the agency’s managers and senior executives meddle in their work, seeking the «right» result for their client. Harrington essentially acknowledged that Moody’s helped to create the prerequisites for the mortgage crisis of the past decade.
US financial regulators have been conducting an investigation of Wall Street’s biggest banks, which has resulted in billions of dollars in payouts. The Financial Times estimates that from 2007 to 2013, major banks paid 200 fines to US financial regulators totaling about $100 billion for various types of manipulation and abuse. This includes bank settlements of approximately $40 billion as restitution for their manipulative acts that caused the global financial crisis.
But for a long time the Big Three rating agencies saw no clouds on their horizon. That situation only changed in February 2013, when the US Dept. of Justice launched an investigation into Standard & Poor’s activities. Initially, the department demanded that the agency pay $5 billion in fines for damages. Later that claim was reduced to $1.5 billion. The Dept. of Justice will get some of the money and the rest will be divided among 19 states and the District of Columbia. A separate $125 million settlement was reached with the CalPERS pension fund. Many experts believe that Standard & Poor’s was singled out for special attention from the US government after S&P lowered the US credit rating from the highest AAA level down to AA+ in August 2011. This was an unprecedented event in the history of the United States and the work of the Big Three. US officials had some harsh words for the rating agency’s decision. Many believe that the investigation was launched against S&P in retaliation, so that in the future the Big Three would not be tempted to raise doubts about the robust health of the US economy. The other two agencies have not yet been subjected to any serious sanctions.
Many serious experts feel that the Big Three’s assessments offer a backwards picture. For example, a year ago (on Jan. 26, 2015) Standard & Poor’s announced that it had downgraded Russia’s credit rating from BBB- to a speculative BB+. On Feb. 20, 2015, Moody’s lowered Russia’s sovereign credit rating from Baa3 to Ba1, with a negative rating outlook. The magazine Business New Europe decided to independently evaluate the accuracy of S&P’s decision. Agency analysts based their downgrade of Russia on the fact that Moscow will soon have problems with external debt servicing, due to that country’s loss of access to international financial markets as a result of Western sanctions. So Business New Europe compared the debt loads of different countries. It turned out that in many respects, a lot of developed countries look much worse than Russia – for example, in terms of the size of their sovereign debt compared with budget revenues. For example, it would take three years of its entire federal budget for the United States to fully repay its public debt. And Japan would need seven of its annual budgets. But Russia would require only six months of tax revenues to settle all its debts.
The final and egregious example of the rating agencies’ political bias is found in Ukraine. Even someone with little knowledge of economics can see that Ukraine’s economic plight for the past two years has been incomparably worse than Russia’s. But the Big Three’s ratings give the opposite picture. I would call this – «ratings surrealism». As we all know, in December 2015 Kiev announced a so-called moratorium on the repayment of its debt to Russia. Everyone agrees that this is sovereign debt. The debtor is the sovereign state of Ukraine. The creditor is the sovereign state of the Russian Federation (the IMF confirmed the sovereign nature of Russia’s loan to Ukraine late last year). According to all the rules of international financial law, a full-fledged sovereign default has occurred. And until now, the Big Three rating agencies have always responded promptly to such events. For them, a sovereign default is roughly equivalent to a devastating earthquake for seismologists. Almost a month has already passed since the date of the default (December 20, 2015), but not one of the ratings assigned to Ukraine by the Big Three has changed.
The surrealism of the Big Three rating agencies, which have already laid the groundwork for the second wave of the global financial crisis, directly or indirectly affects the entire population of the planet. The damage caused by their «creativity» is incalculable, which fully warrants labeling it as the «creativity» of organized crime on a global scale.