Credit Ratings Agencies - Who made them so powerful ? | Hacker News Reader

Credit Ratings Agencies - Who made them so powerful ?

bbc.co.uk

45 pointsivenkys26 comments

To me - its quite astonishing that the Ratings Agencies still hold so much sway , given that they have been thoroughly discredited in the last 2 years.

I wonder, what it would take to have another ratings agency ? Is this simply a case of Market Incumbency ?

Exactly the same as it would take to create a new news organization, I expect.

I mean, we're all reading this as if the BBC is a "credit rating agency" of news, free from any vested interest or political bias, but of course that's not true: the BBC has a history of attacking financial institutions. It didn't create the problems in Northern Rock's business of course, but it is largely responsible for there being a run on that bank and it collapsing (the depositors were never actually in any risk due to government guarantees to all savers).

I find it somewhat ironic that Robert Peston is criticising the ratings agencies for playing a very similar role to the one he played in the Northern Rock fiasco.

Greek bonds are about to mature and there is no money. Without some deal, which wasn't forthcoming because of the fallout in German elections, then Greece would have to default.

If this is not reported in the rating then the Agency has no credibility.

Agreed. It is, however, quite possible for a rating agency to influence the value of various things inadvertently or on purpose.

If reason and sound research leads them to a conclusion that does influence I say all the better.

It was the concern you described that led them to do nothing from 2004-2007.

I find it difficult to believe that these agencies operate independently from politics. Borrowing of recent years would seem to confirm some of this. Agencies seem to form part of the political landscape. In this case the agency is used as a means to apply political pressure: both on Germany to form an unpopular deal and Greece to accept terms.

To me this looks to be part of political pressure applied by Washington on the IMF, Greece and the Eurozone. I'm sure the politicians want to act but any measure is going to be unpopular with one electorate or another. It's a political play for the consumption of the European electorate.

Reading The Big Short by Michael Lewis was illuminating.

Essentially, the ratings agencies have done pretty well over the years on corporate and government bonds. There is a lot of quality historical data, and a relatively small number of institutions involved.

Their models broke down when it came to mortgages and how thousands (millions?) of loans hang together. But that doesn't mean their models of corporate/government debt don't still hold up.

I wouldn't be surprised to discover their models of corporate and government debt contain the same systemic blindness to domino effects. They haven't been fully tested yet, because there's always public money to save companies that are Too Big To Fail.

> I wonder, what it would take to have another ratings agency ?

The hard part is getting recognized, especially by govts. There's a problem in there somewhere....

> Is this simply a case of Market Incumbency ?

In much of the world, anyone can publish an opinion on any bond and lots of folks do, even if few of them call themselves "rating agencies".

I asked this same question of someone I know at TransUnion, and basically, the answer is yes. Although, considering companies have to pay a few cents to report the data, maybe there's a market for a company that allows free reporting and can somehow stay in business for long enough to provide relevant, recent (7-10 years) data. You wouldn't be able to provide the accounts in good standing that remain on the reports indefinitely, but it might be good enough.

Not that it's terrible relevant, but he told me TU has data on people going back to the 1920s.

edit: didn't read the article, but the same concept holds true for business CRAs.

Large pension funds have Terms & Conditions which state what classes of debt/asset each fund is allowed to hold.

These are often defined relative to the Rating Agency score. So when the rating changes (down), they are obliged to sell their holdings and not buy any further debt.

Quite true - which makes one wonder why these standards aren't more explicitly stated via a standard model in the contract - as opposed to relying on a supposedly "impartial" source.

All that S&P has done is to say that Greek debt is junk; but surely Greek debt can't in reality be junkier today than it was last week just because S&P says so?

Ermm, actually it can, because yesterday the probability of a bailout by Germany was different that it is today. S&P in this case is merely reporting what is.

I don't see how an article titled 'Credit Ratings Agencies - Who made them so powerful ?' doesn't discuss the idea of the Nationally Recognized Statistical Rating Organizations (Yes, there is a passing mention of the SEC, but this is the answer to the question):

Ratings by NRSRO are used for a variety of regulatory purposes in the United States. In addition to net capital requirements (described in more detail below), the SEC permits certain bond issuers to use a shorter prospectus form when issuing bonds if the issuer is older, has issued bonds before, and has a credit rating above a certain level. SEC regulations also require that money market funds (mutual funds that mimick the safety and liquidity of a bank savings deposit, but without FDIC insurance) comprise only securities with a very high rating from an NRSRO. Likewise, insurance regulators use credit ratings from NRSROs to ascertain the strength of the reserves held by insurance companies.

Source: http://en.wikipedia.org/wiki/Nationally_Recognized_Statistic...

Two things make them powerful:

- The vast amount of people that simply believe the opinions published by the agencies and consider those the absolute truth

- originators of policies that requires ratings to be put on several financial products before being allowed to be bought by certain institutions, which glorifies the agencie's opinions as the absolute truth

It seemed to me that the market had already begun to move against Greece. If credit agencies don't reflect the lack of political momentum (and a plan to pay creditors) then agencies loose their credibility.

I doubt that S&P acts in an isolated manner, and is part a political play and can be influenced by other organisations, economic reports and political moves. This may even be a mechanism to sell the bailout to the German electorate.

(this is a bit tongue in cheek but..)

Is there any more powerful and feared financial reporter in the UK than Robert Preston?

The guy - who's essential task is to report on the comings and goings of financial institutions so the rest of us can understand - materially contributed to public panic during the banking crisis of last year.

At the time his doom and gloom reporting on national television caused many uninitiated people (in the UK) to panic about the state of the economy; when a more rational response would have been better.

Peston may claim he is only reporting the facts; but his treatment of Northern Rock may well have helped push things over the edge.

Perhaps I am being over zealous in giving Peston some of the blame. Who knows.

[In all seriousness, though, Peston has a history of disliking almost all financial institutions for some reason - and as a result the BBC reporting of the banking crisis was both skewed and problematic. I know quite a few people who misconstrued things from the tone and delivery of information and as a result panicked like crazy.

He may have the makings of a point here; but I always take his opinions with a pinch of salt :) ]

He was certainly rather negative about RBS, HBOS and Northern Rock - but didn't they rather deserve it?

I would rather think the management of Northern Rock caused the run - Peston was just doing his job by reporting it. This might not have been the traditional British way of dealing with these kinds of things but personally I'd rather know that have it all covered up.

I think he let his bias speak alongside the facts; the reporting at the time (especially on TV) was a little misleading.

Ratings agencies must be the most easily forgiven part of the financial system. Why do the markets still move on their advise given that they were proved completely falable less than 12 months ago!

It's about time the ratings agencies started rating debt accurately. EU states have some very serious debt problems.

As does most of the western world.

As does most of the world.

https://www.cia.gov/library/publications/the-world-factbook/...

That graph is a little misleading. For example, Japan is right up there but the majority of their government's debt is internal; not good by any means but not as volatile as the Greek situation. Worst comes to worst, the Japs can just print money on demand - in fact I think there has come to pass a tacit understanding that that is exactly what will happen, as there is no chance of the money ever being paid off by any other means. The Greeks have no such luxury.

I'd like to see a ranking of countries by external public debt.

Relying on regulated agencies to tell us the truth about govt. What could possibly go wrong?

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