If you have read us for a long period of time, you know exactly how we feel about the ratings agencies. We attribute much of the blame of the current financial crisis to their practices and the inherent conflicts of interest in their business models. So far, they have avoided the hangman of the government and the backlash against all of their business drying up. The top agencies are Moody’s Corp. (NYSE: MCO) and The McGraw-Hill Companies, Inc. (NYSE: MHP) for its Standard & Poor’s Ratings Services, with Fitch being the number three player. On top of unjustly avoiding the hangman, they appear to be getting some of the bailout money on at least an indirect basis. This outrages us about as much as some executive compensation outrages much of the public.
Yesterday, there was a note from Connecticut Attorney General Richard Blumenthal regarding why the Term Asset-Backed Securities Loan Facility, or the TALF, sent to Ben Bernanke asking him to stop giving these top three ratings agencies fees that actually put seven smaller ratings agencies at a disadvantage. In short, he is calling this another reward for bad behavior.
The agencies have been widely criticized for their role in not catching all the “Triple-A” ratings that were really worse than junk-rated securities. It seems to have gotten so bad that the “AAA” started getting rubber-stamped on every new securitized debt instrument that came across the desks of the analysts at these firms. Apparently these agencies have not been criticized enough.
It turns out that the TALF requires financial institutions to have their new securities rated by two or more nationally recognized statistical ratings agencies, and these three appear to currently be the only ones that meet this criteria. So these firms are being given a government-assisted paid fee to come in and rate new issuances. Is this direct help via an equity infusion from the government? No, but… If issues and TALF recipients have to get the ratings from at least two of the three agencies, then are the agencies or are they not getting direct assistance? It is really not any different than saying, “You have to buy from one of our three approved vendors: Larry, Curly, or Moe.” Which agency is which of the Three Stooges is up to you to decide. Do the ratings agency owners and managers have salary and pay caps?
Berkshire Hathaway Inc. (NYSE: BRK-A) has recently been criticized over being an indirect beneficiary of the TARP monies, and Warren Buffett’s investment holding company also is the largest shareholder by far of Moody’s. Don’t think that some haven’t looked into conflicts of interest there.
There are other ratings agencies that could stand to benefit if changes would be made, but the reality is that it is probably already too late. At least for this go-around anyhow. Despite the blame and despite the problems of the past these three top ratings agencies are still very entrenched across all of Wall Street and all of Main Street as the “independent” ratings sources.
Of these “other agencies,” some are Dominion Bond Rating Service (or DBRS) and Fitch Ratings. A.M. Best and Egan-Jones Ratings Company also could possibly fit the bill.
JON C. OGG
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