The Lex column in the Financial Times reports that the rating agencies — Standard & Poor’s and Moody’s — are doing financially just fine and, well, even better than fine:
McGraw Hill this week showed the ratings business is on the increase ... Its Standard & Poor’s credit ratings agency, which accounts for the vast majority of the publisher’s profits, produced its first quarterly rise in revenues in two years.
In a business with large fixed costs, any upturn makes a substantial impact on the bottom line. Profitability in McGraw Hill’s financial services division, which includes lower-margin data and research businesses as well as ratings, never hit the lofty peaks of rival Moody’s with an operating margin of some 55 per cent. Nevertheless, S&P still managed to reach a 40 per cent margin, having merely dipped to 34 per cent at the end of 2008.
I have found it remarkable how little scrutiny has been focused on the rating agencies, and how little has been done — sensibly or foolishly — to revamp their incentives and business models. There was some discussion of cutting off the implicit regulatory monopoly created by regulations specifying their services; I am not sure even that has gone anywhere, though I haven’t checked recently. However, Lex adds this cheerful thought:
In spite of widespread gnashing of teeth over rating agencies’ role in the crisis, both companies are even thought to have increased their fees this year. Furthermore, proposed regulation looks less onerous than first feared. McGraw Hill estimates that extra regulatory costs, such as more compliance personnel, will be half what it originally thought.
wm13 says:
Rating agency staffers don’t get paid like top investment bankers, so there’s no occasion for populist posturing. Thus, there’s nothing for Congress to do.
Incidentally, the same point might be made about money market funds: they were clearly revealed as a high-risk enterprise that almost caused the complete collapse of the financial system, and required a huge commitment (in the form of a government guaranty) to survive. But again, money market fund employees don’t get paid the megabucks, so the political classes have no interest.
Quote
October 28, 2009, 5:19 pmPatHMV says:
Thank you for calling attention to this. It boggles the mind that agencies whose sole purpose is accurately assessing the financial condition of businesses and governments could fail so miserably over the previous few years and yet remain immensely profitable. Clear evidence of some kind of disconnect. The problem is that they really are not accountable to anybody.
I remember a number of years ago, I worked for our state’s governor. We sought to cancel a contract between the state and a local government regarding the provision of some correctional services. The local government agency had entered into a lease with a private company, and funded the capital construction necessary through bonds. There were reasons to be highly suspicious of the underlying private business operating the correctional facility (political ties, etc.), and in any event the private business breached the agreement in a major way (all the guards walked off the job, basically). The state was not a party to the bonds, did not guarantee the bonds, did not approve the bonds.
When we began the process of terminating the contract, next thing you know ratings agencies were flying in left and right. They told us quite directly that if the state terminated the contract, they would drop the state’s credit rating by a significant amount. They acknowledged quite openly that the state itself had no legal obligation to repay the bonds. They acknowledged that the state was entirely within its contractual rights to terminate the contract for cause. And still they told us that if we cancelled the contract, they would lower our rating, which would have the immediate consequence of increasing the interest rate the state would have to pay to borrow money for any other purpose. They wouldn’t even work with us to terminate the contract in a manner which would allow for the innocent bondholders to be fully repaid.
They are not creatures which operate within the rule of law. Their decisions and ratings are unchallengable, because anybody who challenges them will immediately pay a steep price for doing so, and it’s not even a price directly imposed by them, just a consequence stemming from the fact that lenders and bond issuers rely so heavily on what they say.
Quote
October 28, 2009, 5:26 pmCDU says:
Actually, the problem is that they are accountable. They are accountable to the people paying for their services, who are the same people issuing the debt that is being rated.
Quote
October 28, 2009, 6:20 pmChrisTS says:
Moody’s is currently investing in and embarked upon a major overhaul of its rating system. They know they screwed up.
I’m not excusing the company — just sharing some insider information.
Quote
October 28, 2009, 8:08 pmCorruption counts « Though Cowards Flinch says:
[...] to think I used to believe the system might be reformed (see further anger here, plus interesting comments revealing both agreement and some astonishing [...]
pay credit report says:
I have in the mid $5 figures languishing at FXLQ or in San Marino, Europe (where ever the F^&#$@ that is) or at Robb Evan
Quote
December 11, 2009, 11:09 pmforeclosure says:
Good post. I just stumbled upon your blog and wanted to say that I have really enjoyed reading your blog posts. Any way I’ll be subscribing to your feed and I hope you post again soon.
Quote
January 29, 2010, 2:06 am