Monday, 19 December 2011

Who owns the ratings agencies?

WORLD Like so many things going on these days of confusion and mistrust, one can't help wondering who exactly owns those credit rating agencies that have come to rule our lives without ever being elected. To delve deeply into the realities below the surface is well nigh impossible (for a little person like yours truly), but a little scratching around turns up  some interesting worms. Okay, in the global economy everything is related to everything else. Chicken and egg thing. But let's just concentrate on the three big ratings agencies, Standard & Poor's, Moody's and Fitch. These are the guys you hear about every day now. Lowering ratings of banks, countries, provinces, continents ... you name it, they rate it.>>>
This site is located in Spain, the guy who runs it has lived here for over twenty years, so he is going to write it with a Spanish slant.

For instance, when the banking conglomerate Bankia was formed in short order last year, the two leading institutions heading it were Caja Madrid and Bancaja. Both of them are significant shareholders in Moody's. The banks that put Bankia on the market are: Bank of America, Deutsche Bank, JP Morgan and UBS, all of whom own considerable pieces of Standard & Poor's. At the time, Bankia's advisor on the matter, Lazard, eventually employed Rodrigo Rato (former Spanish Minister of Economy), when he left the IMF. Rato now headsCaja Madrid, which in effect owns Bankia. Lazard also headhunted Pierre Cailleteau, who who headed the sovereign debt department at Moody's.

US investment funds and billions in bargains
When Spain went through a tsunami of privatizations, particularly of the country's building societies, some of the largest investment funds in the US were licking their chops in anticipation of buying up as many as possible at knockdown prices, according to Público. Among them were Blackrock, Capital Group and Fidelity. All three have shares in all three ratings agencies, which control 95% of the ratings market. Moody's and S&P alone control 80%, Fitch, the remaining 15%.

Funds such as Blackrock, Vanguard and T. Rowe Price also hold significant investments in public debt. Estimates put the amount at 7.5 billion euros. Thus, the ratings agencies lower their ratings on public debt, the State is obliged to pay higher interest rates. The funds and the banks, part owners of the agencies, get a bargain or better interest payments - always supposing a state pays its debt.

Conflict of interest
According to economist Alejandro Inutriesta, Professor at the Stock Market Institute, "The conflict of interests is multiple and incredible. One of the most obvious is that these enormous funds own large parts of the ratings agency system. The trouble is that they are so big and powerful and anyone trying to set limits on them is likely to get burned." The president of the Spanish CNMV (National Securities Market Commission), Julio Segura, says that "eradicating conflict of interests within the ratings agencies must be a priority."

Not long ago, the EU proposed creating a European ratings agency to break the hold of the Big Three, but the proposal does not appear to have gone any further as it has thus far boiled down to the continuation of a self-regulation that evidently does not work. The fox, in fact, among the chickens - but the fox won't complain, will he?

The rest of the world

Both the USA and Europe tend towards the minuscule observation of their own navels, a practice that not only avoids looking at other parts of the anatomy that might be diseased, but precludes observation of other bodies altogether, any of which might provide a cure or at least some wisdom.

We have been hearing about 'emerging economies' that if nothing else should be making our hairs stand on end. China has even been asked to help Europe out and pretty much refused. Brazil and India, much of the same (both of these emerging economies have enormous pockets of abject poverty that should be taken care of first - you know, charity begins at home). If any of the above, or any more emerging economies, were willing or able to help, how would they know what rates of interest to charge Europe? Yup, the ratings agencies.

So, who owns the ratings agencies?
Here is an interesting piece of information about Standard & Poor's: it is owned by McGraw-Hill. And here is a statement taken directly from McGraw-Hill's own website:
The McGraw-Hill Companies is driving the financial services, education and business information markets through leading brands such as Standard & Poor's, McGraw-Hill Education and J.D. Power and Associates. McGraw-Hill aligns with three enduring global needs:
  • the need for Capital
  • the need for Knowledge
  • the need for Transparency
These are the foundations necessary to foster economic growth and to allow individuals, markets and societies to reach their full potential.
Moody's is a spin-off from Dun & Bradstreet (from whence the now old-fashioned term 'dunning' or 'dunned' comes - meaning being chased for payment) but its website is undergoing maintenance as we write - but we'll be back. Nevertheless,  the top institutional owner and only shareholder holding more than 5% of all shares of Moody's is Warren Buffett's company Berkshire Hathaway, holding a share of approximately 13%. Corporate bargains available here, then.

© 2011 Alberto Bullrich

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