“We rate every deal. It could be structured by cows and we would rate it.”
That email, from one employee of Standard & Poor’s to another, emerged in evidence before a US congressional committee during the height of the financial crisis in 2008. It was October 22, the share market was in free-fall as irate politicians took the ratings agencies to task.
Putting aside for a moment this egregious insult to cows – who are gentle animals not given to greed and irrationality like ratings agencies – Moody’s Investors Service came out yesterday and solemnly confirmed its AAA credit rating for the United States. As if it mattered.
This came hard on the heels of another agency, Fitch, also upholding its AAA rating. The third, S&P, has foreshadowed an adjustment to its rating and, now that a debt deal has been hammered out on Capitol Hill, will no doubt sally forth in the near future.
The question is why should anyone care. “The story of the credit rating agencies is a story of colossal failure,” committee chairman Henry Waxmansaid. “The result is that our entire financial system is now at risk.” Former executives from S&P and Moody’s told the committee their employers had engaged in a “race to the bottom” to maximise their profits.
It used to be that only the cream of sovereign states and a handful of big, blue-chip banks attracted triple-A ratings. During the boom years though, the agencies began to sell triple-A ratings to investment bankers for their financial products: even the likes of collateralised debt obligations (CDOs) whose underlying securities were often low-grade, high-risk debts.
This untenable conflict of interest – the agencies get paid per rating – has not changed. The agencies are always reactive rather than proactive, issuing a statement of the obvious well after the market has made its judgment and priced in a new reality.
What has changed is the trust in the system. It is eroding. Trust in credit ratings, trust in banks and financial institutions, trust in government to resolve the debt crisis and manage the economy and, most recently, trust in government statistics.
As if the muddling over the debt ceiling weren’t enough to unnerve markets, the Bureau of Economic Analysis belatedly revealed last week the US economy had contracted by 5.1 per cent during the financial crisis rather than 4.6 per cent. The revisions had everyone wondering what else they had wrong and how long it might take to find out.
According to CNN’s “bailout tracker”, the government has committed $US11 trillion and spent $US3 trillion to rescue the US economy. We’re talking TARP, the Federal Reserve’s stimulus efforts, the AIG bailout, assorted bank takeovers and other financial and housing initiatives. The Fed is the biggest spend.
And, incidentally, as the Fed’s balance sheet has ballooned from a pre-crisis $US900 billion to $US2.85 trillion, those CNN numbers look a tad light – even though $US120 billion of the TARP money has been repaid.
All up we have a situation where Main Street has spent trillions bailing out Wall Street and propping up the economy. Yet at a time when economists had all predicted the world would be in robust recovery, America is sliding towards recession again.
Meanwhile, the debt-ceiling debacle has coincided with the end of the Fed’s stimulus. Until June, America had been merrily buying its own bonds, printing money and funding its own debt via “quantitative easing” programs. This had been propping up Wall Street.
Going cold turkey on stimulus at a time when the economic statistics have just turned south … it’s not going to last. QE, in some form, will start again soon – even as Washington has just gone to the brink of defaulting on its gargantuan debt.
Against the backdrop of spiralling deficits, desperate stimulus, diminishing growth and declining confidence in the system – bear in mind that capitalism is utterly reliant on trust; trust that a counter party can and will honour an obligation – we have the ratings agencies confirming the US as a Triple-A proposition.
This sort of thing can only lend credence to the Tea Party types who reckon they should have let the whole thing blow up and rebuild from the ashes.