The credit rating agencies are taking advantage of the country’s financial problems to increase their own political power. They want to ensure that regulators do not reduce their autonomy and influence.
Their strategy is brilliant. They are not piling on all at once by downgrading the United States in concert. Standard & Poor’s is the bad cop for now, taking the first swipe at the United States last Friday, and seeing its influence confirmed by the stock market’s dramatic reaction. Moody’s and Fitch are playing the good cop — exercising restraint about a potential downgrade, yet still flexing their muscles by criticizing the government both publicly and behind the scenes.
The Revenge of the Rating Agencies
ReplyDeleteby Jeffrey Manns
http://www.nytimes.com/2011/08/10/opinion/the-revenge-of-the-rating-agencies.html
The credit rating agencies are taking advantage of the country’s financial problems to increase their own political power. They want to ensure that regulators do not reduce their autonomy and influence.
ReplyDeleteTheir strategy is brilliant. They are not piling on all at once by downgrading the United States in concert. Standard & Poor’s is the bad cop for now, taking the first swipe at the United States last Friday, and seeing its influence confirmed by the stock market’s dramatic reaction. Moody’s and Fitch are playing the good cop — exercising restraint about a potential downgrade, yet still flexing their muscles by criticizing the government both publicly and behind the scenes.
The rating agencies have the federal government over a barrel. If politicians ignore rating agencies’ warnings, they risk a withering assault of additional downgrades that could undercut confidence in the government and inflict soaring interest rates. The good-cop, bad-cop routine is especially potent because a downgrade by two of the three major rating agencies could lead to negative consequences, such as requiring some bond issuers to secure additional collateral.
Since the 1970s, federal statutes and regulations have mandated that debt issuers obtain ratings as evidence of creditworthiness. An oligopoly of rating agencies used this authority to effectively control access to the financial system. Even a threat of a downgrade from a rating agency could cause credit to dry up, and few inside or outside of Washington dared to challenge their dominance.
The financial crisis jeopardized the agencies’ privileged position. Politicians and pundits accused them of being asleep at the wheel, if not complicit with issuers, in camouflaging risks and misleading investors during the run-up to the subprime mortgage crisis. The Dodd-Frank Wall Street reform law, enacted a year ago but not fully implemented yet, threatened to introduce unprecedented oversight and regulation.
The law called for exposing rating agencies to civil liability in securities lawsuits if their ratings were inaccurate. It also challenged the oligopoly’s dominance by calling for the Securities and Exchange Commission to explore the feasibility of having an independent organization select rating agencies for asset-backed securities, instead of having the bond issuers select and pay the agencies, as they now do.
But the rating agencies struck back, first through civil disobedience. To evade potential liability, they threatened to freeze the markets for asset-backed securities by refusing to allow their ratings to be quoted in S.E.C. filings. The S.E.C. quickly caved and suspended the rule. Meanwhile, the rating agencies have begun a guerrilla campaign of behind-the-scenes lobbying to weaken the commission’s efforts to carry out other parts of Dodd-Frank.
The S.& P. downgrade has elevated this simmering standoff to an overt clash. Politicians will be tempted to wave a white flag by granting the agencies a pass from tough regulation in exchange for the agencies’ not downgrading federal debt further. While that approach may give the United States breathing room in the short run, the government should not give in to such extortion.
Instead, politicians must take the hard medicine of a downgrade in stride and get America’s house in order, because the country faces ruin if the budget imbalances continue, regardless of what rating agencies say. At the same time, they should not forget the rating agencies’ role in the crisis and allow these monitors of creditworthiness to revert to their pre-crisis ways of lax ratings and blindness to deception.