S&P, Moody’s and the first amendment of the American constitution
Last night, in my continuing desire to get to grips with the evils of the international credit rating industry, I asked my Council’s Finance Director, during the treasury management bit of the Audit and Governance committee, what credit rating agency advise he tended to follow when deciding where to stick the council’s reserves.
Interestingly, not least because he’s a very clever bloke, he said he didn’t really follow Standard & Poor’s advice, or Moody’s, but went with the other one of the big three, Fitch’s.
While S&P have been forecasting doom and trying to run the government’s fiscal policy for it, and Moody’s has been telling Phillip Hammond that he’s talking out of his arse, Fitch’s has been, it would seem, quietly getting on with its job.
This morning, quite coincidentally, Duncan Weldon kindly sent me over an FT Alphaville link, which told me all about an American gentleman, a Mr Kolchinsky, who was a Director of Moody’s until recently – until recently, because he got sacked for whistleblowing on what he claims is Moody’s dodgy ‘revenue before honest ratings’ approach to its work.
Yesterday, Mr K appeared in Washington before the House Committee on Oversight and Government Reform to talk about these matters. I don’t know what he said yet, but according to this Reuters article, his written submission includes allegations that ‘Moody’s assigned some ratings that did not reflect all the information it had’ and of ‘Moody’s …knowingly issuing a rating that was wrong.’
This, at first sight, would seem to contradict the view of Giles at the excellent new blog Freethinking Economist, set out in answer to my own ‘conspiracy theory’ about the credit rating agencies, and what I contended was their systematic corruption and abuse of power under guise of objective assessment.
Giles said (of one particular S&P rating ‘flip flop’):
‘I still think the idea that such a blatant movement from the highest rating to one of the lowest can only be cockup, not conspiracy…… Paul, IMHO, overestimates the perfidy, and underestimates the potential incompetence, of staff at S&P: rating thousands of tranches of difficult RMBS etc, with all the problems of asymmetric information/lemons etc that goes into it, is never easy.’
Clearly, we need to see what view the Committee takes on Mr K’s evidence, and of course that will relate to Moody’s rather than S&P and it may be no direct comparisons can be made.
But perhaps most interestingly, S&P sent not a Director, but a ‘first amendment lawyer’, to represent it at the Committee hearing yesterday.
Now, I’m no expert on the American constitution, but I do know that the first amendment reads:
‘Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.’
What I can also be pretty sure of is that the people who put together the amendment within the Bill of Rights, back in 1789, probably didn’t have in mind its use by a massively powerful financial corporation to allow it to say exactly what serves its own business interests at the expense of what’s actually true, and in way which our Mr K now seems to suggest may not be in accordance with the interests of the vast majority of the American people, or of the rest of the world that is subject to the clout of the American finance industry.
Fortunately, the First Amendment also guarantees the right to assemble, and I think something along those lines may still exist in Britain. Anyone for a demo?