Moody’s Rating Agency – A Case of the Pot calling the Kettle Black !

Picture: Reuters/Mike Segar

Photo credit: Reuters

Ratings Agencies Fitch, Moody’s and S&P are symptomatic of a skewed (West) and unbalanced financial world order which continues to wield too much power in deciding whether any particular country possesses the economic credentials to borrow money.

Recently, ratings agency Moody’s agreed to pay penalties amounting to a not insignificant R11.7 billion for its role in the US 2008 financial crisis. To be clear, that particular crisis was not just confined to the US but resulted in many economies around the world tanking. 

Moody’s was fined for issuing false credit ratings that eventually led to the resulting market crash. In some cases, credit ratings firms gave out top grades to junk deals, in order to secure business from the banks.

This followed a probe which found that Moody’s issued high ratings to sub-prime home loans, which later collapsed in 2007 – as has been reported before – In its report on the global financial crisis, the U.S. Financial Crisis Inquiry Commission concluded that “the failures of the credit rating agencies were essential cogs in the wheel of financial destruction”, that “the three credit rating agencies were enablers of the financial meltdown”, and that “this crisis could not have happened without the rating agencies”. The report states that “from 2000 to 2007, Moody’s rated nearly 45,000 mortgage-related securities as triple-A” and that “in 2006 alone, Moody’s put its triple-A stamp of approval on 30 mortgage-related securities every day”.

Yet, these are the same companies allowed to look at developmental states like South Africa’s and decide with impunity on how the world should view us as a credit risk. The irony is astonishing.

Unsurprisingly the Chinese, which forms part of the BRICS construct – Brazil, India, China and South Africa, are determined to start an alternative or alternate ratings agency which will look more fairly on nations with growing economies.

Also, history has shown that when caught out, the ratings agencies’ common refrain was one of astonishing ignorance and a sense of blamelessness – they have stated in the past that their advice constitutes “an opinion” that is only valid for a “point in time”. 

The three – Fitch, Moody’s and S&P – are a financial mafia which should be rendered irrelevant. Surely the markets should dictate credit worthiness and not three companies which are clearly compromised from a political and ethical perspective.

In 2010/2011 former Moody’s analyst William J. Harrington, essentially blew the whistle on corrupt practices at the institution.

They also pointed out some of Harrington’s more salient points in a 78-page report which suggests that Moody’s ratings often do not reflect its analysts’ private conclusions. Instead, rating committees privately conclude that certain securities deserve certain ratings–but then vote with management to give the securities the higher ratings that issuer clients want. It further states that Moody’s management and “compliance” officers do everything possible to make issuer clients happy–and they view analysts who do not do the same as “troublesome.” Management employs a variety of tactics to transform these troublesome analysts into “pliant corporate citizens” who have Moody’s best interests at heart. In addition, it was noted that Moody’s product managers participate in–and vote on–ratings decisions. These product managers are the same people who are directly responsible for keeping clients happy and growing Moody’s business. The report further states that at least one senior executive lied under oath at the hearings into rating agency conduct. Another executive, who Harrington says exemplified management’s emphasis on giving issuers what they wanted, skipped the hearings altogether.

So why do we continue to trust these institutions? 

It is because they are protected by a world financial system who depends on smoke and mirrors to either prop up countries or destabilize the status quo and broker favorable investment deals that has very little to do with the well-being of that particular country but more to do with how much more money they can extract from a system that favors them completely.

Thus, formations such as BRICS has become such a target for the West, it threatens a financial world order that operates within a corrupt framework which continues to flourish in itself but sows misery for the rest of the world.

Buthanane Ngwane is the Gauteng Provincial Secretary of the South African Students Congress (SASCO)