Rating Agencies

I am of opinion that rating agencies benefit from their position and I will develop my opinion as this.

The agencies thus constitute a government-sanctioned oligopoly that earns big profits from its special status. This doesn't mean their ratings are pure advertising; the agencies often say things that the issuers who paid them would prefer not to hear. They seldom, however, say it before everybody else in the world already knows it. They now exist to codify conventional wisdom, not give investing advice.

When the agencies are sued for having gotten a rating wildly wrong, they contend that what they are doing is equivalent to opinion journalism.

The agencies' big profits are of course enabled by the special authority granted by government regulators, foundation bylaws, and the like. The result, in the world of private debt, is a lucrative orgy of buck passing: Investment bankers sell securities on a buyer-beware basis, investors and regulators outsource their assessment of the quality of those securities to the ratings agencies. No one ever takes responsibility.

The sovereign ratings arms of the agencies — the people who rate the debt of the U.S. and other countries — are somewhat outside of this debate. They too are paid by issuers, but it doesn't appear to be as close, conflicted, or lucrative a relationship as that between, say, the structured-finance raters and the big investment banks. They also usually don't have any special knowledge: Private debt issuers often let ratings agency analysts look at information that investors don't get to see. In the case of the U.S., there are hundreds of budget wonks in Washington with access to at least as much information as S&P had at its disposal. The sovereign raters therefore look a teeny bit more like investment advice givers and less like issuers' partners in crime.

The 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.

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

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