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Switch to Forum Live View Kill the Rating Agencies NOW
3 years ago  ::  Dec 06, 2011 - 8:21AM #1
CharikIeia
Posts: 8,301

The three investment rating agencies Standard & Poor's, Moody's, and Fitch are likely the financially most powerful entities on our planet. They basically control the planetwide flow of investments, they can shut down whole industries and governments. And they are not democratically controlled in any way, shape or form!


A recent "mistake" concerning Standard & Poor's rating of France's credit-worthiness, has led to strong worldwide movements on the stock exchanges, and has generated billions for some investors while taking away these billions from other investors. A mistake? If so, one with consequences...  online.wsj.com/article/BT-CO-20111110-71...


It is time to disempower these agencies!


Yesterday, Standard & Poor's announced that maybe maybe, but very likely they might downgrade creditworthiness of 15 Eurozone countries, from their first rank 'AAA' to their second rank 'AA+' (as they did with the USA earlier this year). As Bloomberg writes, S&P Jumps Into Politics Again With EU Outlook Warning:


By John Detrixhe and Zeke Faux - Tue Dec 06 02:00:23 GMT 2011


Standard & Poor’s, rebuked by Warren Buffett in August after downgrading the U.S. over government gridlock, is again injecting itself into the political process, just as European leaders are poised to meet for a summit aimed at ending the region’s sovereign-debt crisis.



www.bloomberg.com/news/2011-12-06/s-p-ju...


After investment bankers having earned a lot of money on US and European sovereign debt over the last decades, the rating giants now punish every move to solve the debt problem. As soon as a government in Europe commits itself to tight budget discipline, they downgrade the country's rating - as it were, a punishment for doing the right thing.


What may be the zeal driving these guys?
A possible answer is implicitly given in this news story:


Oil recovers to above $101 after S&P warning



Oil prices recovered to near $101 a barrel Tuesday after falling on news that a U.S. credit rating agency may cut the debt ratings of 15 eurozone countries.


By early afternoon in Europe, benchmark crude for January delivery was up 4 cents to $101.03 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose 3 cents to settle at $100.99 on Monday.


In London, Brent crude was up 52 cents at $110.33 on the ICE Futures exchange.


www.google.com/hostednews/ap/article/ALe...



In my view, the rating people are the same breed and the same kin and clan of the investment bankers. The only thing that counts in their books are quick returns with double digit rent. They are not interested in survival of our economies, our societies. They are parasites that need to be gotten rid of... the sooner the better.


tl;dr
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3 years ago  ::  Dec 06, 2011 - 8:48AM #2
TemplarS
Posts: 6,812

Dec 6, 2011 -- 8:21AM, CharikIeia wrote:



In my view, the rating people are the same breed and the same kin and clan of the investment bankers. The only thing that counts in their books are quick returns with double digit rent. They are not interested in survival of our economies, our societies. They are parasites that need to be gotten rid of... the sooner the better.






Of course- they work for the bankers (the lenders). They do not work for the borrowers.  They are not some sort of independent agency.  In effect- they are the bankers.


It is not much different from the 3 companies which calculate your personal credit score (at least here in the US).  It burns my butt that you have to pay these people in order to get your own credit score- but the reason is the same; Though it is your credit score, these companies do not work for you, they work for the banks.


The logic under which they operate seems curious (and, might not apply to countries as well as it does to private borrowers).  If an entity is having debt problems and it close to default (that is, being unable to pay the interest on their loans)- the solution seems to be to downgrade theiur credit, which has the effect of raising the interest rates on the money they borrow- and thus makes it harder to stay solvent.  This might work for a private borrower- it has the effect of discouraging lenders from throwing good money after bad.  But you cannot writeoff a country as easily as you can a corporation.


 


 


 

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3 years ago  ::  Dec 06, 2011 - 9:33AM #3
CharikIeia
Posts: 8,301

If they were just doing their job (i.e., just determine creditworthiness), I think I'd be fine.


But what we see is that they overstretch their legitimate reach. They warn countries and politicians. They trade in gossip and 'mistakes'. They create volatility in the markets, apparently fully on purpose.


This creation of artificial volatility is what makes investment bankers' clients richer, at the expense of tax payers and normal (long-term) investors worldwide.


As I see it, the rating agencies today work for their colleagues in the big investment banks, by creating volatility in the markets and letting their buddies get rich from that volatility. A clan of insiders making each other rich and hyper-rich.


The proper, original purpose of rating agencies was to decrease volatility and make the chaotic field of investment destinations a bit more predictable for investment bankers. They turn out to do the exact opposite these days... dysfunctional anti-life.

tl;dr
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3 years ago  ::  Dec 06, 2011 - 1:01PM #4
jane2
Posts: 14,295

Chari and Templar :


I like your analyses and agree.


Was it Lord Acton who said : power corrupts and absolute power corrupts absolutely ??


 

discuss catholicism
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3 years ago  ::  Dec 06, 2011 - 1:10PM #5
farragut
Posts: 4,012

'Twould seem like a nice time for someone else, private, public, commercial, or pro bono to initiate a new rating service. You'd just have to sell your product to the potential buyers. Competition is supposed to be a good thing.

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3 years ago  ::  Dec 06, 2011 - 1:21PM #6
TemplarS
Posts: 6,812

Sure, Farragut, but it won't happen unless the current system with its conflicts-of-interest is regulated or legislated away.


Fat chance of getting that through the current Congress. 

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3 years ago  ::  Dec 07, 2011 - 2:43AM #7
CharikIeia
Posts: 8,301

Dec 6, 2011 -- 1:10PM, farragut wrote:


'Twould seem like a nice time for someone else, private, public, commercial, or pro bono to initiate a new rating service. You'd just have to sell your product to the potential buyers. Competition is supposed to be a good thing.



The EU has defined rules according to which rating agencies inside the Eurozone are allowed to operate. There are a few new agencies over here. But of course, the oligopoly of the three big ones mentioned in the opening post cannot be broken unless also the financial locations where they have their home base participate.


But London and Washington are reluctant to put any restrictions on their financial industry.


That's what you get when you outsource the real economy, and the only thing that adds to GDP in your country are the banks... a state of affairs that is much more severe in the UK than in the US, by the way.


Here today's open letter to The Times by David Cameron:
ukinmontserrat.fco.gov.uk/en/news/?view=...


If you search for the key word "financial", you'll find just this one half-sentence - but it's the crucial one in the whole sermon:


... it is also important that there are rules to keep the single market fair and open for key industries for Britain, including financial services.

tl;dr
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3 years ago  ::  Dec 07, 2011 - 11:30AM #8
Fodaoson
Posts: 11,156

The financial rating system and  the credit agencies are examples of how  private enterprise works.  Someone starts a consulting  company that offers other companies information  about work quality of firms to other firms who might want to do business with other companies. The consulting firm  sends people to work  sites , completed and in progress, to look at  work quality, material  quality and  to observe the process.   If substandard work is being done and poor quality material  is being used they report it. If high quality  craftsmanship  and high quality material is used they report  that.  The spend  time, money and effort to gather information about a myriad of companies . The they charge other s for the information, their product is information The customers are firms that want to know the best firms to do business with and get quality work and products  The bonds and credit rating companies are like the consulting firms.  The well know firms, S&P, Equifax etc., have demonstrated  they have reliable knowledge of individuals, companies and agencies  and so they are listened to  They are not government  agencies and their information is  their opinion. It  so happens they are good at what they do and their opinions have proved worthwhile, knowledgeable  and  dependable.    People complain  about low credit scores and ratings but not high.   The rating are based on reliability of doing business. Those individual and firms that are slow to pay , late, over extended etc. have low ratings; the rating firms do not  do the actions they  just report them  dn their opinion of how the target  is doing and probably will l perform in the future.  A rating  is not the fault of S&P, or Equifax ,etc., it is the  rated firm or individual  past  performance.   If a loan company wants  to risk a loan on car, thy want to know the reliability of being paid back. It is not S&P problem it is the US and other National government   problems being reported.

“I seldom make the mistake of arguing with people for whose opinions I have no respect.” Edward Gibbon
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3 years ago  ::  Dec 07, 2011 - 12:36PM #9
rocketjsquirell
Posts: 16,029

The best way to disempower the rating agencies is to stop using them. No rating agency is worth the name when the copmpany being rated pays for the rating. (Which is how the big three work). No one should make investment decisions based on the ratings of these organizations. Once the investment community stops relying on them and touting their ratings, they will go away.  

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3 years ago  ::  Dec 07, 2011 - 12:49PM #10
vra
Posts: 6,403

The ratings agencies are so untrustworthy that this administration has had to run two stress tests, one just recently, of some of the major banks to make sure some are not ready to default, and we have to remember that Moodys and S & P were giving AAA ratings to junk that the investors well knew would fail. 


However, whether we like it or not, these agencies are likely here to stay largely because there's a distrust of the government doing it alone, and for some good reason I might add.  To a large degree, it's still very much a "buyer beware" system that we have, and we're simply not going to get rid of that in its entirety. 

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