The new public enemy
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talkpoliticsDavid T Beers is probably the most influential among the un-famous guys in the world of global finance. Don't know him? Well, the Finance ministers of most countries know who he is too well. He's the chairman of the department of public debt at Standard & Poor's. Which means that he supervises the ratings that the agency is putting on the debt instruments of each government. A couple of weeks ago, when S&P downgraded the US from the coveted triple-A to AA+ (the horrorz!), the hive mind of Wikipedia finally made up its mind and added an article dedicated to David T Beers. And quite timely.
Beers is the man who downgraded Greece's rating tocrap eeh, I mean "Junk" last year, and this way made the EU's rescue operations even more complicated than they already were. But what really granted him the unusual place in the spotlight was the relegation of the US from the elite club of the triple-A's. This unprecedented, although not-too-surprising decision, not only increased the shock waves across the nervous markets in the last days, but it also brought a lot of anger on Beers, S&P and the other two big agencies, Moody's and Fitch. We could say they're now public enemy #1 both for the politicians and people at both sides of the Atlantic.
The big "rating trio" (which controls roughly 90% of the ratings market) is far from immune to past sins, and the need for change seems obvious. The agencies have always been considered a necessary evil, but now the pressure for curbing their role is particularly immense. The risk of an avalanche of discontent leading to hasty reforms is real, as is seen in some signals coming from Europe. The EU smart-heads are becoming rather nervous.
"There are two superpowers in the world today in my opinion. There's the United States and there's Moody's Bond Rating Service. The United States can destroy you by dropping bombs, and Moody's can destroy you by downgrading your bonds. And believe me, it's not clear sometimes who's more powerful." Those are words from NYT columnist Thomas Friedman which he wrote back in 1996. Apparently this is still the case even today, when the influence of Moody's, Standard & Poor's and Fitch hasn't decreased one bit. Only the anger against them has increased.
At the moment the rating agencies are the undisputed frontrunner for the Most Hated Institution trophy. The political attack against them started in Europe. In July, when Portugal's rating was downgraded tocat-poop "Junk" as well, the President of the EC, Barroso publicly accused the agencies of being "anti-European", having no understanding of the specifics of the EU countries and having a markedly pro-American bias (S&P and Moody's are based in the US, and Fitch is partly property of the French firm Fimalac, but it still has American roots). In the cannonade against the "oligopoly" of the Big Three were also involved former German Finance minister Wolfgang Schaeuble, ECB president Jean-Claude Trichet, and the energetic EU commissioner of Justice, Viviane Reding who called for "smashing the cartel" of the agencies.
After the US treasuries were dumped into Second Credit League, the US also joined the chorus. The revelation that S&P had miscalculated their assessment by $ 2 trillion gave the critics some additional ammo. The predominant sentiment was: "We're turning to them for advice, and they do a mistake in the maths, and it turns out they don't understand anything of what they're talking about!" Regardless of their approach to the event, both analysts on the left and right were this time unanimous that S&P had gone too far. Paul Krugman called the decision "cynical" and said that the people in the agency are the last ones who you should be trusting. And the always warlike Michael Moore even called for Obama to arrest the whole board of directors of S&P, citing the example in Italy where Berlusconi is playing tough. A couple of weeks ago the police in Milan raided the offices of S&P and Moody's on suspicions that they were involved in the "abnormal" movement of the Italian bond prices. And of course we all know about the speculations around Soros' manoeuvres on the market, and his bet on the downgrade.
On the one side, the complaints of the politicians sound like accusing the weatherman for having rain. It's true that the Euro zone has a serious debt problem, and the rating agencies are hardly responsible for that. The main motive for downgrading the US rating wasn't so much the doubts in the country's ability to serve its debts, but rather its reluctance to do so. After the political madness in DC at the end of last month, it's not just the S&P analysts who have serious doubts about that.
But in the meantime, the very rating of the agencies themselves isn't flawless either. It was exactly them who should be detecting risks while it's early and blowing the horn, but they slept through the whole subprime balloon. They kept giving triple-A to Lehman Bros until the very day of its bankruptcy. What's more, as some digging shows, these colossally erroneous assessments weren't made due to ignorance, but because of a reluctance to spoil their relations with their clients who were paying very well to keep getting nice ratings.
So, institutions that are by definition totally opaque, unreliable and in blatant conflict of interest, are exerting a disproportionately large influence on the whole financial system. After the 2007 crisis, the US and EU made some steps to change this. Some rules were introduced, requiring more transparency in the rating process. In the US the requirement for some companies to use the rating agencies was removed altogether.
Today's fiasco will probably lead to still more reforms. There's a danger of over-regulation as much as there was of free-for-all chaos, and both extremes would make things worse instead of improving them. It's a delicate balance. In the EU for instance, there's a plan for creating a European rating agency which would counter the influence of the Big Three. But the doubts about the fairness of such an institution and the concerns about a possible politicising of the rating game is a thing that should be taken in consideration. It's better to do something later, but properly, rather than doing a hasty and sloppy work right here and now.
Many analysts (plus the agencies themselves) would prefer a scenario where the ratings are removed from the regulation process. At the moment the ratings are being used for many things - from defining the criteria for capital adequacy of the banks, to forging the requirements for bonds and treasuries issued by the central banks. The more the people are paying attention to these ratings, the more the whole system gets distorted. They're being attributed too much significance which doesn't really correspond to their value.
After the initial shock after the US downgrade, the markets spoke quite quickly - they practically didn't pay almost any attention to the downgrade (save for a few initial bumps, and pretty rough ones, at that); there was no leap of the interest rates on the US treasuries, investors even flocked into them in search of a safe haven, and there was no reflux from the dollar. Which is probably a good signal that the unhealthy fixation on the ratings is decreasing. People may not be that stupid, after all.
Or the more likely reason could be that the trillions of dollars still held in treasuries worldwide can't be invested in anything more useful than US bonds, like it or not. Which is another long story, and a worrying one.
Beers is the man who downgraded Greece's rating to
The big "rating trio" (which controls roughly 90% of the ratings market) is far from immune to past sins, and the need for change seems obvious. The agencies have always been considered a necessary evil, but now the pressure for curbing their role is particularly immense. The risk of an avalanche of discontent leading to hasty reforms is real, as is seen in some signals coming from Europe. The EU smart-heads are becoming rather nervous.
"There are two superpowers in the world today in my opinion. There's the United States and there's Moody's Bond Rating Service. The United States can destroy you by dropping bombs, and Moody's can destroy you by downgrading your bonds. And believe me, it's not clear sometimes who's more powerful." Those are words from NYT columnist Thomas Friedman which he wrote back in 1996. Apparently this is still the case even today, when the influence of Moody's, Standard & Poor's and Fitch hasn't decreased one bit. Only the anger against them has increased.
At the moment the rating agencies are the undisputed frontrunner for the Most Hated Institution trophy. The political attack against them started in Europe. In July, when Portugal's rating was downgraded to
After the US treasuries were dumped into Second Credit League, the US also joined the chorus. The revelation that S&P had miscalculated their assessment by $ 2 trillion gave the critics some additional ammo. The predominant sentiment was: "We're turning to them for advice, and they do a mistake in the maths, and it turns out they don't understand anything of what they're talking about!" Regardless of their approach to the event, both analysts on the left and right were this time unanimous that S&P had gone too far. Paul Krugman called the decision "cynical" and said that the people in the agency are the last ones who you should be trusting. And the always warlike Michael Moore even called for Obama to arrest the whole board of directors of S&P, citing the example in Italy where Berlusconi is playing tough. A couple of weeks ago the police in Milan raided the offices of S&P and Moody's on suspicions that they were involved in the "abnormal" movement of the Italian bond prices. And of course we all know about the speculations around Soros' manoeuvres on the market, and his bet on the downgrade.
On the one side, the complaints of the politicians sound like accusing the weatherman for having rain. It's true that the Euro zone has a serious debt problem, and the rating agencies are hardly responsible for that. The main motive for downgrading the US rating wasn't so much the doubts in the country's ability to serve its debts, but rather its reluctance to do so. After the political madness in DC at the end of last month, it's not just the S&P analysts who have serious doubts about that.
But in the meantime, the very rating of the agencies themselves isn't flawless either. It was exactly them who should be detecting risks while it's early and blowing the horn, but they slept through the whole subprime balloon. They kept giving triple-A to Lehman Bros until the very day of its bankruptcy. What's more, as some digging shows, these colossally erroneous assessments weren't made due to ignorance, but because of a reluctance to spoil their relations with their clients who were paying very well to keep getting nice ratings.
So, institutions that are by definition totally opaque, unreliable and in blatant conflict of interest, are exerting a disproportionately large influence on the whole financial system. After the 2007 crisis, the US and EU made some steps to change this. Some rules were introduced, requiring more transparency in the rating process. In the US the requirement for some companies to use the rating agencies was removed altogether.
Today's fiasco will probably lead to still more reforms. There's a danger of over-regulation as much as there was of free-for-all chaos, and both extremes would make things worse instead of improving them. It's a delicate balance. In the EU for instance, there's a plan for creating a European rating agency which would counter the influence of the Big Three. But the doubts about the fairness of such an institution and the concerns about a possible politicising of the rating game is a thing that should be taken in consideration. It's better to do something later, but properly, rather than doing a hasty and sloppy work right here and now.
Many analysts (plus the agencies themselves) would prefer a scenario where the ratings are removed from the regulation process. At the moment the ratings are being used for many things - from defining the criteria for capital adequacy of the banks, to forging the requirements for bonds and treasuries issued by the central banks. The more the people are paying attention to these ratings, the more the whole system gets distorted. They're being attributed too much significance which doesn't really correspond to their value.
After the initial shock after the US downgrade, the markets spoke quite quickly - they practically didn't pay almost any attention to the downgrade (save for a few initial bumps, and pretty rough ones, at that); there was no leap of the interest rates on the US treasuries, investors even flocked into them in search of a safe haven, and there was no reflux from the dollar. Which is probably a good signal that the unhealthy fixation on the ratings is decreasing. People may not be that stupid, after all.
Or the more likely reason could be that the trillions of dollars still held in treasuries worldwide can't be invested in anything more useful than US bonds, like it or not. Which is another long story, and a worrying one.
(no subject)
Date: 16/8/11 00:18 (UTC)(no subject)
Date: 16/8/11 04:58 (UTC)(no subject)
Date: 16/8/11 00:21 (UTC)(no subject)
Date: 16/8/11 05:11 (UTC)It's like the BBB. Lots of blue hairs depend on this to find good product and services and file complaints against the bad ones. Well their best ratings can be bought by business's. It really doesn't matter how corrupt the rating service is, consumers still refer to it daily.
(no subject)
Date: 16/8/11 12:37 (UTC)(no subject)
Date: 16/8/11 05:45 (UTC)(no subject)
Date: 16/8/11 07:03 (UTC)(no subject)
Date: 16/8/11 07:36 (UTC)S&P: So?...
Soros: So, you make the downgrade, and I get 10 billion, then I give you 1 billion.
S&P: So we have to just write some numbers here and there, and we get rich?
Soros: Yep. Basically.
S&P: That's cool, man!
(no subject)
Date: 16/8/11 09:10 (UTC)(no subject)
Date: 16/8/11 12:38 (UTC)(no subject)
Date: 16/8/11 18:54 (UTC)(no subject)
Date: 16/8/11 09:56 (UTC)Though it is difficult to see in what way reforms could happen that would make an appreciable difference.
As for the US downgrade....given the polarised state of the US government it was just waiting to happen, alas: China's rating agency downgraded the US almost a year ago.