Ratings Agencies: Watchdogs under Suspicion
Published in Süddeutsche Zeitung
(Germany) on 23 August 2011
by Hans-Jürgen Jakobs (link to
original)
Their decisions plunge financial markets into turbulence. The ratings agencies have awakened doubt in their independence. Their risk assessments themselves have become at risk. The influential agency Standard & Poor’s must use the change of their company's head to build up new trust.
It has long been true that it goes poorly for the bringer of bad news. In antiquity or the Middle Ages, they were beheaded. The modern messengers of the world economy sit in ratings agencies. They observe the creditworthiness of individual nations, issue grades and in so doing, can put stock prices in flux. And as the bosses of these ratings agencies have become the favorite enemy of politicians in Europe and the United States, whose task it is in the meantime to act as if the matter is easily manageable in spite of continually rising national debt. They would rather badmouth the evaluators in ratings agencies as if they arbitrarily pull their row of numbers out of a hat like figure skating judges.
Now the head of the most influential ratings agency itself, Deven Sharma of Standard & Poor’s is caught. According to official versions, he became the victim of the same financial capitalism for which his specialists have the triple A ready – or not. Large stockholders criticize that he had too little concern for the structure of the firm and did not uphold core values. Apparently, the doubters issued junk status rating in light of the discharged manager’s manner of governing. They appraised their own ratings agency highly unfavorably, and they dream of AAA, the best rating that their own firm can award to others.
After years, it is the end for their head. The long-planned personnel matter allegedly had nothing at all to do with the many mistakes, oddities and the strong public debate surrounding Standard & Poor’s. But that view cannot get past the many problem areas left to the new head Douglas Peterson – all the challenges of reestablishing broken trust.
It is unforgettable how Standard & Poor’s – in unison with the other two big agencies Moody’s and Fitch – appraised the highest rating for mortgage securities before the financial crisis of 2007 and 2008, which proved to be economic hazardous waste. Previously, good ratings sold well worldwide. The raters from Manhattan also rated firms like Enron, insurance group AIG and the investment bank Lehman Brothers notoriously positive, until they collapsed due to lack of money or assets. And a few weeks ago, the mathematical wizards of the New York firm simply added wrong, were mistaken by no less than $2 trillion and yet downgraded the top rating of the United States, which promptly caused a stock crash.
One cannot evade the impression that the people at Standard & Poor’s are simply making politics, while blaming Washington for a crippled political system – and after difficult negotiations that nonetheless led to a compromise. For a long time investigators have had an eye on the firm, a subsidiary of the publisher McGraw Hill, in which many financial firms are involved. On account of the mistake in the financial crisis, the U.S. Justice Department and the SEC are investigating insider trading in the downgrading of the United States.
In short, the whole calculation model of the watchdogs for the welfare of the country and corporate finance is under suspicion. Risk assessment itself has become a risk. The standard argument of Standard & Poor’s that they are just voicing opinions no longer cuts it. So a new boss must tackle it. He has the opportunity to rebuild the disrupted, indeed destroyed, relationships with the governments of this world.
The question is whether this is compatible with the goal of meeting stockholders’ demands for increasing returns by splitting the company. The evidence of economic weakness at S & P suggests more than ever that the power and omniscience of the ratings agencies are totally overrated. They are agents of the debt economy, but not overriding entities like the International Monetary Fund or the European Central Bank. Decisions about investments and credit therefore may not be permitted to be tied to their subjective appraisal. They are merely sources of information.
And yet: Even ratings agencies can be right. It is, after all, easy to criticize them and difficult to replace them. When the smoke has cleared at Standard & Poor’s, when the bosses have been exchanged and new structures have come into being, one will determine that the debt ratios of individual nations remain high – and that Greece cannot be saved from bankruptcy. It is guaranteed.
It has long been true that it goes poorly for the bringer of bad news. In antiquity or the Middle Ages, they were beheaded. The modern messengers of the world economy sit in ratings agencies. They observe the creditworthiness of individual nations, issue grades and in so doing, can put stock prices in flux. And as the bosses of these ratings agencies have become the favorite enemy of politicians in Europe and the United States, whose task it is in the meantime to act as if the matter is easily manageable in spite of continually rising national debt. They would rather badmouth the evaluators in ratings agencies as if they arbitrarily pull their row of numbers out of a hat like figure skating judges.
Now the head of the most influential ratings agency itself, Deven Sharma of Standard & Poor’s is caught. According to official versions, he became the victim of the same financial capitalism for which his specialists have the triple A ready – or not. Large stockholders criticize that he had too little concern for the structure of the firm and did not uphold core values. Apparently, the doubters issued junk status rating in light of the discharged manager’s manner of governing. They appraised their own ratings agency highly unfavorably, and they dream of AAA, the best rating that their own firm can award to others.
After years, it is the end for their head. The long-planned personnel matter allegedly had nothing at all to do with the many mistakes, oddities and the strong public debate surrounding Standard & Poor’s. But that view cannot get past the many problem areas left to the new head Douglas Peterson – all the challenges of reestablishing broken trust.
It is unforgettable how Standard & Poor’s – in unison with the other two big agencies Moody’s and Fitch – appraised the highest rating for mortgage securities before the financial crisis of 2007 and 2008, which proved to be economic hazardous waste. Previously, good ratings sold well worldwide. The raters from Manhattan also rated firms like Enron, insurance group AIG and the investment bank Lehman Brothers notoriously positive, until they collapsed due to lack of money or assets. And a few weeks ago, the mathematical wizards of the New York firm simply added wrong, were mistaken by no less than $2 trillion and yet downgraded the top rating of the United States, which promptly caused a stock crash.
One cannot evade the impression that the people at Standard & Poor’s are simply making politics, while blaming Washington for a crippled political system – and after difficult negotiations that nonetheless led to a compromise. For a long time investigators have had an eye on the firm, a subsidiary of the publisher McGraw Hill, in which many financial firms are involved. On account of the mistake in the financial crisis, the U.S. Justice Department and the SEC are investigating insider trading in the downgrading of the United States.
In short, the whole calculation model of the watchdogs for the welfare of the country and corporate finance is under suspicion. Risk assessment itself has become a risk. The standard argument of Standard & Poor’s that they are just voicing opinions no longer cuts it. So a new boss must tackle it. He has the opportunity to rebuild the disrupted, indeed destroyed, relationships with the governments of this world.
The question is whether this is compatible with the goal of meeting stockholders’ demands for increasing returns by splitting the company. The evidence of economic weakness at S & P suggests more than ever that the power and omniscience of the ratings agencies are totally overrated. They are agents of the debt economy, but not overriding entities like the International Monetary Fund or the European Central Bank. Decisions about investments and credit therefore may not be permitted to be tied to their subjective appraisal. They are merely sources of information.
And yet: Even ratings agencies can be right. It is, after all, easy to criticize them and difficult to replace them. When the smoke has cleared at Standard & Poor’s, when the bosses have been exchanged and new structures have come into being, one will determine that the debt ratios of individual nations remain high – and that Greece cannot be saved from bankruptcy. It is guaranteed.