I’m not excusing the company – just sharing some insider information.

PatHMV: The problem is that they really are not accountable to anybody.

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.

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.

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.