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Credit rating agencies must be covered by banking crisis inquiry (if only there was one)

Posted on 14 February 2012 | 9:02am

Having ranted and raved (moderately) whenever credit rating agencies have delivered their Deus Ex Cathedra pronouncements on other European economies, I intend to do so again now that they have turned their attention to Britain.

They, this time, are Moody’s, though they might as well be Standard and Poor, or any of the others who seem without questioning to be described by the media as ‘a leading credit ratings agency’, the word ‘leading’ granting them an authority and esteem essential to the deep tones that must accompany lead stories on the news bulletins.

But every time I hear of their pronouncements, I want to know – who are they? What do they do? How do they do it? And do they or their clients make money from the currency movements which their pronouncements herald?

These are questions which ought to be answered in part by the media, and I have been dropping twitter hints to the BBC’s Evan Davies that he might fancy the subject. if not him, then Robert Peston, but please, someone, take an hour of telly’s time to lift the lid on these people and organisations.

They are also questions that should, more importantly, be covered by the public inquiry which ought to be taking place, country by country, into the banking crisis which has cost every family dear.

These so-called leading credit rating agencies were part of the financial establishment giving a clean bill of health to bankers and regulators and others as the crash developed. How did they get it so wrong? A question worth bearing in mind as they pronounce to the world now.

I know very little about them, which is why I want others better qualified than I to dig around them. But I also want to see them, the bankers, the regulators, the politicians and policy-makers give their account of what happened.

We have Chilcot for Iraq, Leveson for phone-hacking, yet nothing remotely comparable for a series of events that took the world economy to the brink, and the consequences of which are still costing all of us. I am genuinely baffled as to why there is not a greater demand for such an inquiry. And intrigued as to what such an Inquiry would show about these mysterious agencies.

  • Mary Sweeney

    I SO agree with all of this. Having worked with the Credit Agencies in the 1980s it was totally apparent even then that their analysis was self-serving and obviously often wrong. They and the banks continue to prop each other up at vast cost to the global economic system. It is astonishing that Govts won’t call them on their mistakes – they wrap their pronouncements in jargon, and we are bullied out of our common sense! I have been ranting about this on my fb page and @marysweeney0 for ages!! We need a serious economic journalist to take this on, please. Come on BBC/FT! 

  • Andy Burke

    …..and the best trick is to create the perception that it was public spending that created the crisis and not the banks – business (and bonuses) as usual while the dole queues get bigger and the welfare state and the NHS is destroyed

  • Abyssful

    I thought it was common knowledge that credit agencies were at the heart of the problem? They gave stupidly high ratings to risky sub prime mortgages giving too much confidence to the market and making themselves a fortune in the process. Now they undermine entire countries bonds to make private bonds look more attractive. Their won’t be an inquiry till the people responsible have moved out of their jobs, which won’t be happening anytime soon.

  • Mary Sweeney

    I don’t know what happened to my comment earlier, so I’m trying again?! So agree with all of this, have been ranting about it on FB for months. See Alastair Darling on the subject too. The Rating Agencies have been consistently wrong about lots of product/company/country ratings since the 1980s. Come on BBC/FT – do some work on this! @marysweeney0.

  • http://www.sdcrafts.co.uk/ Shirley Davis

    It strikes me that the person you need is Jeremy Vine and Panorama, maybe? And I always question any financial ‘expert’ on TV when their opinions/findings/advice are not examined.

    If it is true that we are not all financial experts, why the mystique – come one media, educate us, unless the emperor suspects his new clothes?

  • Michele

    I reckon there must be a link with the insurance companies that cover international loans.

    We definitely need to know more. 

  • Richard

    Be very careful what you wish for.
    Any UK inquiry would embarass the New Labour government, of1997 and later, for it’s credit fuelled growth and encouragement of people to spend, spend spend as there would never again be a  “boom and bust” risk. The ensuing housing price boom and the PFI binge made people who followed the government lead believe in the perpetual nature of the boom.
    Tax credits to £60,000 pa earners was supposed to buy voters in middle class forever.
    Any close analysis would result in the public questioning whether Balls & Co could ever be trusted with the economy again.

    • Michele

       I’m not sure what’s wrong in Working Tax Credits (remember the first word) for people earning £60k if their family is large enough to warrant them.

      We do need some large families to balance out the negatives caused by those with none or a small issue. 

      It was not about ‘buying votes’.

    • Dave Simons

       I think we can now take it as read that Gordon Brown’s comment about ‘no more boom and bust’ and Peter Mandelson’s comment about being ‘intensely relaxed about people getting filthy rich’ were both big mistakes. At least, I’d like to hear anyone defend them. Boom and bust are endemic to capitalism and people get filthy rich off the backs of others. Both comments were typical of the New Labour project, in which Socialism was ditched and Neo-Liberalism embraced – all because we the electorate had become that way inclined since 1982, and still largely remain so, despite 2008. New Labour worked, in that Tony Blair won three general elections in a row, and a lot of progress, mostly now ignored or taken for granted, was made under New Labour which would never have been made under the Conservatives. If the latter had been in government in 2008 they would have bailed out the banks the same as New Labour did – except more so. And they would have twisted the argument so that the blame fell on public services rather than the bankers just as they continue to do now. If New Labour had tried to control the banking sector they would have had all hell let loose on them from the media and people like you who now criticise it for not imposing regulations. When up against the economic power of capitalism Labour always loses out – whether its cap-in-hand to the IMF in 1967 and 1976 or allowing credit-fuelled growth from 1997 to 2007. My memory of New Labour’s years – and of the Thatcher/Major years – was of constantly binning letters from banks and financial institutions which were trying to persuade me to get into debt. I didn’t get one from any government.

  • Rookiescot

    No way will Cameron allow an inquiry into the banks and financial industry and their role in the meltdown.
    First of all its findings would go a long way to dispel the myth that “Its all Labours fault”.
    Secondly the Conservatives derive over half of their parties funding from donations given by the square mile.

  • Jj_Murray

    CRA’s seem to be controlled by the same people who run investment houses. Their political influence bypasses democratic control. So much damage has been inflicted on the public sector based on their implicit threat. Governments justify all sorts of behaviour in deference to them. They need to be hounded by the media as their political power is vastly out of proportion.

  • Libdem

    Interesting that the EU wants to create its own credit agency due to alleged bias/manipulation of the main 3 agencies. Wonder if it can be ‘honest’ in its views given that it will be created/controlled by the EU?

  • Michele

    Someone is just advising Eddie  Mair on R4’s ‘PM’ (it’ll be on iPlayer around 6pm and the discussion’s about 8mins in) that the ratings are decided between about 5 people in closed rooms …… I suppose he means at each of the agencies.

    He’s also saying they aren’t all that importantl  I’m tempted to quote Mr Howerd again !

  • Howard

    Credit rating agencies are always ‘leading’ as you say, and have you noticed how EM always ‘seizes’ on news that is bad for the  government! I’m worried he might do himself an injury one day ;)

  • reaguns

    This is a really simple concept, I explained it a few blogs back but I’ll do so again later.

    Just had to mention that it is no wonder the general population are ignorant of simple financial concepts, I just watched the BBC news and they said that inflation had went to 3.6% (down from 5.2% a couple of quarters back) so the “cost of living has dropped.” NO! You imbeciles! The cost of living was increasing at a rate of 5.2%, now its increasing at a rate of 3.6%! It has not “dropped”.

  • Anonymous

    The US Inquiry – Financial Crisis Inquiry Commission – was quite useful on this, and other issues.   It (including hearings and testimony transcripts and videos)  is online at http://fcic.law.stanford.edu/ and the final report has also been published as a book.  Quite dry but systematic; can be quite technical but also incisive.  Definitely worth checking out.
     
    I also like John Eatwell’s comments published here http://www.guardian.co.uk/business/2010/jun/13/budget-deficit-public-sector-cuts that remind us that “These (credit rating agencies) are the same clowns who assured everyone that securitised sub-prime mortgages were AAA rated.”
     

  • Anonymous

    There is nothing mysterious about ratings agencies. They rate all kinds of investment products and entities, from banks, shares, financial instruments, and government bonds.

    They played a monumentally incompetent role in the financial crisis by rating CDOs (groups of mortgages including subprime ones packed together) as AAA. So lots of banks, insurance companies, and many others bought these thinking they were triple A when they were actually junk.

    They were too lenient. But rating financial instruments is hard.Rating countries is much easier. You look at the countries GDP, debt, deficit and a few other things, and by any of these measures most of the countries in Europe deserved to be downgraded earlier and by more than they have been. Again, the credit ratings agencies have been too lenient.

    This is not the credit ratings agencies fault. If you have low debt, low inflation, good growth – then you have nothing to fear from the ratings agencies in fact they will send signals for investors to invest in your country just as they are doing with Switzerland, Singapore etc.

    If you have money in a pension, or in an insurance scheme, or a bank, then you should be pleased that someone is telling them not to invest the money in stupid countries.

    Can people make money from this? Yes. There are lots of ways to make money from stupid countries. You can short their bonds, you can bet on them defaulting on their debts, you can bet on them not defaulting on their debts, or you can simply move your money into AAA rated countries and products.

    Evan Davis is a good person to ask, try Andrew Neil too – he is always scathing about financial institutions.

  • Davie

    These credit rating agencies – aren’t they little more than firms of accountants? It’s a bit like Capt Mainwaring telling Churchill that he can’t have any more money to fight the Nazis.

  • Anonymous

    For sure the insurance companies are linked in a few ways.

    Are you talking about CDS (credit default swaps.) These are the products that pay out if a country defaults. You can bet on a country defaulting, or rather insure yourself just in case it defaults if you take these out. But it also needs someone on the other side of the trade to bet that the country won’t default, and it needs a country to get itself into such a bad shape that it defaults.

    In Greece and elsewhere they are trying to have an unofficial default rather than an official one so that they don’t trigger a load of these.

  • Anonymous

    Also there are plenty of books, websites of varying reps but the trusty old Grauniad, FT, Economist and Telegraph will have plenty of material explaining the ratings agencies.

  • Anonymous

    ” If the latter had been in government in 2008 they would have bailed out the banks the same as New Labour did – except more so.” Don’t know about the “more so” but otherwise sadly you are right, unless someone like John Redwood had been PM, which is of course impossible.

    There have been American presidents who would not have bailed out the banks, and at least not in the way that did happen, and in fact in the old days the American president would not have had the power to bail out the banks even if he wanted to – he would neither have had the legal basis nor the money to do so!

  • Anonymous

    A tax cut would have helped them more. Fundamental difference in philosophy. Tax credits involve more state control and more expense.

  • Anonymous

    “Now they undermine entire countries bonds to make private bonds look more attractive” No, they make other countries bonds look more attractive – Switzerland, Singapore etc. I certainly wouldn’t invest in any company bonds. Who do you trust to pay you back more, a company or a country?

  • Michele

     I don’t think everyone that has or will become filthy rich has done so off the backs of others.
    It’s not helpful to create a division or resentment  between the rich and the less so. 
    I know rich people supporting employees and their families and I know others that would consider me rich (who’re right to do so compared to their situations); you’re rich yourself compared to many in the world…… would you like them to resent you and consider you a greedy pig?

    Being separatist and didactic isn’t helpful, some filthy rich are actually also quaite naice and do a lot of good.
    Should we all resent TB’s new earning power or that of CB?  Rags yaddering about what they’ve earned know little about their expenses and how many people’s careers they’re helping and to what end.

  • Michele

     Paxman did actually ask a couple of months ago something along the lines of ‘Just who are Standard and Poors’ and made it sound as if there were unspoken letters ‘tf’ after ‘w for who’.

    I don’t know whether the agencies that rate nations operate in the same way as those that rate individuals. 

    Given the latter’s practice of listing ratings from their company members (who I dare say pay subscriptions) without advising the subjects re what is being put on the net about them I doubt it.

    It’s amazing to think it could be so, n’est pas ?

  • Michele

     I think everyone knows what they do reaguns, the question is about to whom are they connected and why is their effect so immediate when they seem to have little responsibility or liability to the world?

    They seem to me to be one of those edifices that have to prove themselves, which becomes an end in itself. 

    I’m sure banks themselves can suss debtors’ situations and they should get on with it, admit that they rate clients and stop offloading ‘blame’ to third parties.

    These agencies have to fulfil their own reason to exist (or prove there is one) and need to keep changing assessments in order to prove their raison d’etre (I threw the last bit in for someone special xxx).

  • Michele

    This is to the 7-day availability of Alan Little’s last programme about the EU and Euro predicament :
    http://www.bbc.co.uk/programmes/b01bwddj

    He talks about the apparently-national suspicion in Finland about Germany’s role re Greece ???   Suggestions about something like Nazi stormtroopers?

    It’s all quite confusing and given the private arrangement that Finland tried to make with Greece some months ago and their requirement that in exchange Greece would have to put 50% of the loan value on deposit in a bank I’m not sure about the justification for the suspicion about Mrs Merkel.  Maybe (more likely not) someone will explain it for me?  

  • Anonymous

    Found an alternative view to mine, pointed at by Evan Davis (who is really good). Just one thing to point out, it says that the UK government can always pay its debts just by printing the money to do so. Yes it can but that causes inflation which can be bad or can be catastrophic depending on the extent of it (it led to the rise of Hitler after all) anyway:
    http://notthetreasuryview.blogspot.com/2012/02/moodys-downgrade-both-osborne-and-balls.html

  • Dave Simons

    They should have said the rate of increase of the cost of living has dropped. They also tagged on that VAT was no longer included in the inflation figure, but I didn’t hear any adjustments made.

    • reaguns

      Exactly Dave.

  • Michele

     

    I disagree, nuff said.

  • Olli Issakainen

    Rothschilds control S & P. George Soros, who works closely with Rothschilds, is a shareholder of Moody´s.
    Credit rating agencies were part of systematic corruption in the financial sector which caused the financial crisis of 2008.
    This has so far cost over $20tn.
    Inside Job is a brilliant film about this corruption.
    As credit rating agencies only give “OPINIONS”, there has been no criminal charges against them.
    But they gave AAA ratings to worthless financial instruments – knowingly!
    2008 financial crisis caused the recession. Millions lost their homes and jobs. World´s financial system almost collapsed because of greed, incompetence and corruption.
    The truth about this systematic corruption must now be told.

  • Mark Wright

    Alastair, were these agencies ever discussed or heeded during the boom years? The fact that not even you know who these people are suggests that not many do.

    I cannot believe that somebody, somewhere is not making a LOT of money every time these ‘agencies’ make one of their self-fulfilling pronouncements.

  • Anonymous

    I think the effects you speak of are being observed Michele. The ratings downgrade of America last year, and the one for UK so far have made very little difference to markets, probably because the ratings agencies are so discredited and people now know they are too lenient and behind the curve. As you say banks and so on will have done their own ratings, if a normal person can tell that Italy and France are stupid places to invest then what can the professionals do.

  • Anonymous

    One reason the ratings downgrade has had little effect is that investors look for countries with sound money. We don’t have this so investors were already looking elsewhere.

    Our government doesn’t want sound money because then they wouldn’t have been able to, for example, cut minimum wage by substantially more than the 22% the Greeks are complaining about.

    Must be great to govern stupid people.

  • Anonymous

    The data agrees with me.

    I worked for the tax credits agencies (all of them) and I watched taxpayers money getting pissed away (some of it on my salary).

    Tax credits are a purely political device, not an economic one.

    Nuff said.

  • Dave Simons

    Was Peter Mandelson correct then to say he was intensely relaxed about people getting filthy rich, a variation of Margaret Thatcher’s ‘There is the ladder. Climb as high as you can and the best of British luck’?

  • Anonymous

    What they really want to do is “regulate” moodys and s&p and by regulate they obviously mean “silence”.

    I think its ok if they create their own agency. It will have no credibility. I would look to the Chinese ratings agencies for a view on Europe or US, not the EU one, and vice versa. I would look at the lowest rating and then drop it further, knowing the immense pressure on the ratings agencies to be optimistic.

  • Michele

    Are you really sure he did DS?  Perhaps you can get this person to play the tapes he mentions.
    http://robinbrown.co.uk/2012/01/calling-peter-mandelson-a-liar/

    Steve Jobs was filthy rich, Bill Gates still is, I’m glad both did as well as they did.   
    There’s presently controversy about the suicides of workers in factories making computers and iPhones.  Apparently these workers are paid fractions of pennies.  The trouble is that no matter how much the Jobs and the Gates of the world are willing to pay the factory owners that is no guarantee of how much will be passed on to workers where there is no minimum wage, no welfare control re working conditions and little possibility of a better person (if a foreigner) coming along and running their own, fairer facility.

    So, like I said at the start of this “I don’t think everyone that has or will become filthy rich has done so off the backs of others”.

  • Michele

    Post proof, not opinion.

    Whether a person’s tax liability is lowered before being taken according to their dependents or is  standardised for all at the point of deduction and credited back to some it should  all amount to the same thing.

    You have experience of one system, others have experience of both and among both groups there will be disagreement about which system is most efficient.

  • Ehtch

    Which should come first – money or people, hmm? I am being sarcastic by the way. Money was initially a tool for efficient way of obtained food, shelter and security – security as in giving your monach money to pay for an army and navy to repel invaders. But we seem to have lost our way, and now we fall on our knees to it instead. Money has gone out of control and it is making idiots of us all, even those with barrow fulls of it.

  • Mike Dever

    The credit rating agencies exists for themselves
    and as a great way for investment professionals to subrogate their
    responsibilities to someone else in order to cover their own asses. On top of
    it all the regulators have empowered them by requiring various investors to use
    them prior to putting their money into certain bonds and other debt issuances.
    I talk about the failure of the credit rating agencies and government
    regulations in my book “Jackass Investing.” I’m pleased to provide
    readers with a complimentary link to the two chapters dealing with this (Myth
    #13: It’s Best to Follow Expert Advice and Myth #14: Government Regulations
    Protect investors):

     http://bit.ly/ugSnBf

    http://bit.ly/tGoIJ1

  • Dave Simons

     ‘It’s not helpful to create a division or resentment  between the rich and the less so’

    OK – let’s all stop going on about bankers’ bonuses and making heroes out of legendary figures like Robin  Hood. The filthy rich have worked hard for every penny they’ve got – so much more than the rest of us – and it really isn’t ‘helpful’ to create a division between us and them and to wallow in the politics of envy. In fact let’s all join the Conservative Party tomorrow! Lead the way, Michelle!

  • Michele

     Can you not read?  It’s one ‘l’ in my name Dayve.

    You seem to have difficulty with plurals.  The FACT that some rich bastards exploited their workers to get rich does not mean all the rich did so. 

    Can I remind you yet again  …..
    “So, like I said at the start of this “I don’t think everyone that has or
    will become filthy rich has done so off the backs of others”.

    There ARE exploiters, there are also lots of people that are truly innovative and creative and whose reason for doing what they do is not about the money money not about the kerching … oh, where was I?

    You have to separate the making and selling of things that are beneficial and then happen to be profitable to someone from those that are just about silly status.

    If you can’t do so you need to send your computer to the scrap heap and stop being hypocrital and full of resentment.

  • Ehtch

    By the way, Henry Eight was on the right lines with rich monasteries, grasping as much coin into their coffers, in the early sixteenth century. And you all thought it was all about the Pope in Rome and Anne Boleyn – ha-ha, in a non-Alan Patridge Norwich style, ABBA,
    http://www.youtube.com/watch?v=ETxmCCsMoD0

  • Ehtch

    Just watching Greece being discussed on Newsnight – which was a better situation for them,  what they found themselves in at the end of WWII, or now?

    Bastard money and their devils that worship it, as per Jesus turning the tables of the money lenders in year dot.

    Anyway, video here of Greek hotel paid by fantasy money it has turned out now. By the way, Marsheaux is a phenominal Greek couple of ladies group come to mind about a decade ago, who has and had things to say. This one from a couple of years before things happened, from circa 2006,
    http://www.youtube.com/watch?v=DKF-owJe5C0

    True artists can predict spongy paths coming up, feet sinking style.

  • Anonymous

    What sort of track record do you have investing, ie what sort of money have you made? (Before I consider spending any time on your book.)

  • Anonymous

    Where you say it should all amount to the same thing, perhaps it should but it doesn’t. One takes more admin, a new computer system, and we know how that goes. We all agree (don’t we?) about the “leaky bucket” concept.

    There are studies proving the greater efficiency of taxs cuts, even saw some when I worked there, though no doubt someone gets paid to commission studies to ‘prove’ it either way.

  • Dave Simons

     Sorry about the surplus ‘l’. I blame the Beatles for that! Not sorry about anything else though – sorry!

  • Michele

     Sorry for the rant about my name :-( Its being mis-spelled happens all the time.  My Dad went to great pains to have it spelled the way it is on my BC – accent an’ all.

    Cockneys pronounce it Meeeshew all the time  and that’s bad enough ;-)

  • Libdem

    The thing that annoys me about the EU creating its own agency is that it will be us paying. Everything the EU does involves us paying yet more and more to them p**s up against the wall.

    I agree over the Chinese as they have such large interests now in both the EU and the USA and think I maybe trust them more……

  • Anonymous

    Ah yes, good point. If it were to independently pay for itself it would have to be credible, and to be credible it would have to rate a lot of EU debt as junk. So you’re right, it will be us who pay for it.

  • http://www.crao.eu/ CRA observatory

    Mr. Campbell,
     
    Parliamentary hearings in the US and Europe conjure up a fairly good picture of what credit rating agencies (CRAs) are about and it is now common knowledge that as Prof. William Black puts it the industry is run on a “don’t ask, don’t tell” basis, as a result of the extraordinary laxity which contrary to any institution acting in a fiduciary capacity places them under no obligation to perform due diligence investigations of the figures provided to them by the issuers they rate and by whom they are paid.
     
    I fear that an inquiry would no doubt yield results no more realistic, objective and useful than those of the two inquiries pertaining to the death of Dr. Kelly.
     
    I believe what is called for is:
    a) to make it mandatory for CRAs to perform due diligence on the data forming the basis of their analysis of the issuer’s capacity and willingness to honor its current and future liabilities whenever they have reason to believe such data may not be accurate or complete;
    b) to make them liable for any negligence in their conduct of such due diligence and analysis.