But are the ratings agencies an empire in decline?
They can bring down governments, impoverish entire nations by triggering sharp rises in the cost of their debt, and drive heads of state to rage and frustration. They are the credit rating agencies that, essentially, issue opinions on credit worthiness. President Berlusconi attacked them as “the locusts of international speculation,” when they mooted a downgrade of Italy.
“Ratings often work like gasoline when poured on a fire,” a German economist observed last year during the first Greek crisis. Yet the power of the big three agencies – Standard & Poor’s, Moody’s and Fitch – may be approaching an end.
The agencies’ history began in 1906 when Standard Statistics started rating corporate and municipal bonds. But it took Fitch to devise the modern system: it came up with a scale running from triple-A to D in 1924. Here are some recent milestones:
• In the 1970s, the big three start charging rated companies for their assessment of credit-worthiness in a system that would later raise accusations of major conflicts of interest. Around the same time US regulations require that the bonds of municipal authorities and other government organisations are rated by the big three. A quasi-monopoly is created.
• In 2001, in the wake of the dotcom crash, the US Securities and Exchange Commission launches a full-scale investigation into agencies’ anti-competitive practices – among other issues. Later that year, the agencies suffer a blow to their credibility when the debt of utility giant Enron is rated investment grade four days before it goes bankrupt.
• In 2006, president George Bush starts the dismantling of the agencies’ power when he signs into law the Credit Rating Reform Act. Standard & Poor’s protests the law violates the right to freedom of speech. The SEC introduces tougher regulations anyway.
• In 2008, the collapse in the value of triple-A rated collateralised debt obligations – the CDOs that lay at the heart of the financial crisis – further undermines agencies’ credibility. They reply their ratings are only “point in time” opinions, not guarantees. A furious Kathleen Casey, commissioner of the SEC says the agencies had their most profitable years between the late nineties and 2008 while providing ratings that were “catastrophically misleading.”
• In 2010, America’s Dodd-Frank laws reforming the financial sector require all federal bodies to effectively write agency ratings out of the system and replace them with “appropriate alternative standards of credit worthiness that are as uniform as possible.” The SEC sees “manifest serious flaws” in the agencies’ business model.
• In early 2011, the European Commission threatens to establish its own independent agency. “It is quite strange,” says president Jose Manual Barroso, “that the market is dominated by only three players.”
• In August, Standard & Poor’s downgrades America’s sovereign bonds – safest of safe havens – from AAA to AA+. Bond king Mohamed El-Erian, Pimco’s chief executive, warns: “S&P’s actions will probably unite Europe and the US in an effort to curb the agencies.”