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Rating agency again steps into political fray
First, the U.S. debt ceiling debate; now Europe. Standard & Poor’s threat to cut countries’ credit ratings appears meant to prod political action.
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Kai Ryssdal: Say what you will about the credit rating agencies -- and plenty of people have had their say -- but you've got to admit S&P and the gang know how to make a splash.
Yesterday, Standard & Poor's warned 15 European countries -- Germany and France among them -- that their credit rating was at risk of a downgrade. Today, S&P followed up by putting Europe's big bailout fund on similar notice.
Granted, some flavors of European bonds might not be an especially good investment right now, but our New York bureau chief Heidi Moore explains the real reason S&P is reminding us of it now probably has more to do with certain European political meeting at the end of the week.
Heidi Moore: In the runup to a European summit this week, a lot of government officials there were outraged that Standard & Poor's threatened to slash the credit rating on their bonds. Some vowed to investigate the ratings agencies. U.S. officials reacted the same way when S&P cut Washington's top-notch rating in August.
Lawrence White: Nobody likes to be downgraded, and so there's always a lot of political huffing and puffing immediately after a downgrade.
That's Lawrence White, a professor at New York University's Stern School of Business. His colleague, Richard Sylla, points out investors seemed less concerned than politicians.
Richard Sylla: The response of the markets was, you know, ho hum.
That's because the bond market decided months ago that Europe had a slim chance of pulling its financial act together.
Peter Boockvar is a portfolio manager with Miller Tabak.
Peter Boockvar: The bond market is many steps ahead of the ratings agencies. Always has been and always will be.
So right now, S&P is directing its messages towards politicians who need to cut deficits.
Mark Cliffe is the chief economist for ING.
Mark Cliffe: I think the ratings agencies clearly are wielding some political power here, but I think we have to recognize that they were given some political power in the first place by policymakers.
The ratings agencies were created by Congress in the 1930s. Here's Sylla again.
Sylla: The government said you can prove that you're investing safely if you buy the securities that are rated investment grade by Moody's and S&P and Fitch and so on.
S&P said today that European leaders earned their warning with their "hesitant" and "piecemeal" efforts to fix the huge debt problem. So you could say that the ratings agencies have learned from their political creators how to grab a headline.
In New York, I'm Heidi Moore for Marketplace.
The credit rating agencies are good at fighting for their own survival but they are irrelevant, in addition to being incompetent, which they’ve repeatedly proven. Look at the market's reaction after the U.S was downgraded. U.S. debt rallied. And the reaction after threatening to downgrade Europe (Ho-hum). That is because the markets already set the credit worthiness of any borrower that has outstanding paper. The price is out there. The price of credit default swaps is out there. That is the 'real' credit rating of a sovereign or corporate borrower. Ratings are both redundant and dumber than the crowd-sourced price that already exists. I talk about the failure of the credit rating agencies in my book "Jackass Investing." I'm pleased to provide readers with a complimentary link to the chapter in which they’re discussed (Myth #13: It's Best to Follow Expert Advice):
http://bit.ly/ugSnBf
Mike Dever
Author, Jackass Investing: Don't do it. Profit from it.
Did Heidi Moore pull that part about rating agencies being created by Congress in 1930's out of her head? Investopedia has an article on the history of the rating agencies here: http://www.investopedia.com/articles/bonds/09/history-credit-rating-agen.... According to the article, Fitch was started first in 1913, next came Moody's in 1914 and then Standard & Poor's in 1941. The article doesn't mention the 1930's at all. According to the article, the fundamental change in rules that led to the expansion of the rating industry came in 1975. Can you please correct or clarify this on your show? Thank you.
Twas written: "The ratings agencies were created by Congress in the 1930s."
- This statement is simply untrue. The ratings agencies were not created by Congress, and they do not originate in the 20th century. They were private and came about alongside the railroads; at least the U.S. ratings agencies were. Standard & Poor's was likely the first one. All of this can be found easily online, probably wikipedia, and in several of the better histories of the American West.
This is an important point, because in fact, these agencies have no governmental authority, whatsoever, but are granted informal and indirect authority by the state. Important distinction. Is this undue influence?
