Why are credit ratings agencies still taken seriously by business people and governments, despite their track record ?
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Many will agree with Professor Prem Sikka that the influence of these agencies is extraordinary.
His article in The Conversation – an independent source of news and views, sourced from the academic and research community – raises important points about credit ratings agencies:
- They are a major money-spinner. In 2012, Moody’s reported profits of $1,077 million and 2013 is expected to produce record profits as investors seek shelter from growing financial uncertainty.
- Notions of social stability, justice, and fairness are beyond their remit. The general message from the Moody’s downgrade is that the UK government must deepen its austerity program and attack hard-won social rights on education, pensions, healthcare and unemployment.
- They can have a serious impact on national and household accounts
Sikka looks at their track record
“For many years, the UK-based banks engaged in organised tax avoidance, money laundering, interest rate manipulations, mis-selling of pensions, endowment mortgages, payment protection insurance and many other scandals. These scams did not persuade credit rating agencies to reduce the UK’s credit rating. Perhaps they approved of hot money rushing to London to take advantage of scams.
“The very concept of risk assessment requires some openness and a relatively free flow of information, but credit rating agencies continue to give higher ratings to opaque jurisdictions. Bermuda, whose opaque structures often enable corporations and wealthy elites to avoid taxes elsewhere, is rated Aa2, while the economic powerhouse China is rated Aa3. Oil-rich Saudi Arabia is rated Aa3, the same as the Cayman Islands which is well-known for its secrecy, opaque structures and fiddle factories that facilitate tax avoidance.
“Credit rating agencies have a history of poor performance. Enron, the fraud-ridden US energy giant, collapsed in December 2001. Right until its demise, it continued to attract favourable credit ratings. These enabled the company to overstate its profits and assets and understate its liabilities. Credit rating agencies said that lessons will be learnt, but the banking crash once again has shown that the emperor had no clothes”.
And, most seriously, Sikka points out that the report of the hearing before the US House of Representatives’ Committee on Oversight and Government Reform recorded that Moody’s, Standard & Poor’s and Fitch, the world’s biggest credit rating agencies, maintained A-ratings for Lehman Brothers and US insurance giant AIG until early September 2009, just days before their collapse and bailouts.
He concludes that credit rating agencies wield enormous economic, social and political power, but do not owe a “duty of care” to the stakeholders affected by their opinions. These issues have now become the subject of several legal disputes. Credit ratings form the basis of economic experiments that can result in austerity drives, unemployment, loss of social welfare, and ruined lives; there is an urgent need to check the economic, social and political power exercised by them.
Read the article here.
PCU asked the author to explain why these organisations are taken seriously, despite their track record, adding ‘surely it has to be more than wining and dining the ‘right’ people’. He replied:
“They are taken seriously because they have the appearance of voodoo science, maths and jargon; business people and governments seek comfort in the idea that risks can be quantified and even eliminated. Risks are always manufactured and rarely eliminated – rather they are displaced – and that is what we have witnessed in the banking crash”.