If global finance were anything like the rest of life, no one would be paying much mind to the credit rating agencies, who have been revealed to operate with about as much discretion as a corner streetwalker. Yet, in a moment that now feels as laden with danger as any since the financial crisis of three years ago, the credit rating agencies get to decide whether the world blows up.
Technically, they must determine whether the finances of the United States are sufficiently sound to avoid downgrading the creditworthiness of American government savings bonds, an action that could inflict pain broadly. They must assess whether a convoluted deal to bail out the Greek government should or shouldn't be grounds to declare a sovereign default –- a term that global investors generally heed as a dictate to start dumping the currency in question.
In laymen's talk, the credit ratings agencies –- the people who pass muster on the likelihood that debts will be repaid -– now enjoy the power to determine whether the global financial system will again slide to the edge of doom.
This would be hilarious, were it not deadly serious. The three dominant credit ratings agencies –- Standard & Poor's, Moody's Investors Service and Fitch Ratings -– played a leading role in how we got to this perilous moment, with money so universally tight that governments are feeling pressure to slash spending, with talk of deficits and the (wrongheaded) embrace of austerity the only conversation the powerful set are willing to entertain.
Back in the days of the real estate bubble and the casino-style trading of mortgage-linked investments whose end delivered the global crisis, the credit ratings agencies served as primary enablers of the festivities. They were the people who should have been shouting out warnings that a speculative bubble was building and should have ended the gambling, yet they kept saying that everything was wonderful. It was as if high finance from Wall Street to London to Tokyo was throwing a full-out bender in a rented suite of a house of ill repute, and the credit rating agencies were the guys sending up more drugs and hired companionship, while paying off the cops to patrol somewhere else.
Huge mortgage lenders like Countrywide and Washington Mutual paid hefty commissions to brokers who wrote loans to anyone not verifiably dead, then took those loans and sold them to the giant investment banks -– Goldman Sachs, Lehman Brothers, Citigroup. The Wall Street bankers packaged these loans into bonds that they then sold off around the globe –- to pension funds in the United States, to governments in Asia, to private investors in Europe.
How did they pull off this feat of alchemy, turning mortgages written willy-nilly, with scant credit checks, into seemingly rock-solid bonds that could be sold to conservative investors, like the managers of public retirement funds? With the eager complicity of the credit rating agencies. The agencies accepted billions of dollars in fees from the Wall Street banks for advice on how to structure their offerings so as to garner the highest ratings -– AAA, the gold standard, the sign that a bond is essentially as reliable as one delivered by Uncle Sam.
It was a game, and a lucrative one at that. The banks amassed great piles of garbage -– loans written to people with no demonstrable way to make their payments -– and the ratings agencies showed them how to build this trash into sculptures shaped like AAA. For this, they were paid handsomely, because their assent was the key to placing these bonds so widely and driving up their price. The public money managers were in many cases restricted to buying assets with AAA ratings, meaning the agencies had the power to shape the size of the market.
And when homeowners actually started falling into delinquency en masse, revealing these supposedly sterling bonds as piles of garbage, the credit ratings agencies kept their fees. They fended off the inevitable flurry of lawsuits from aggrieved buyers of the bogus bonds with free speech arguments: They had just issued their opinions, they asserted, and what a shame that they had turned out to be wrong about pretty much everything. It was only a coincidence that their consistent errancy had enabled the people who paid them for their lousy opinions to become stupendously rich themselves.
The Wall Street traders kept their money, too, and the smart ones made more by buying up distressed bonds that were close to worthless during the worst of the financial crisis, flipping them for profit later on. The only people who actually got hurt by all this were, well, everyone else: taxpayers, homeowners, savers, retirees, working people. And now the American economy is again menaced by a rush to slash spending to close state and federal budget deficits -– a process that will only weaken a stagnant economy, reinforcing the hurt.
Meanwhile, ideological fanatics in the Republican party are refusing to lift the Congressionally-imposed debt ceiling, which would leave the Treasury unable to make good on its debts after August 2, unless they first extract deep spending cuts. A failure to lift the debt ceiling before the deadline would be an act of stupefying madness, a declaration that the American Treasury -- for better or worse, the linchpin of global finance -- cannot be counted on to honor its debts. The mere possibility that political leaders could fail to strike a deal to avert this outcome is sowing unease in global markets, as powerful institutions from China's central bank to sovereign wealth funds in the Middle East wonder if there is any adult supervision left in Washington, and whether the dollar is maybe not the greatest place to put their savings.
The Obama administration has already signaled its willingness to cater to the fanatics by weakening crucial parts of the remaining social safety net (Medicare, Medicaid, Social Security), and still no deal is in hand. And even if a deal is struck, many experts wonder whether it will be long-lasting enough and sufficiently comprehensive to assuage the anxieties unleashed in global markets by this sorry spectacle.
And who gets to play arbiter of competing perceptions? Who rules on whether the budget-cutting looks sufficient to justify the maintenance of the United States' official creditworthiness, or whether a downgrade is in order? Who gets to decree whether the European deal struck this week is a sufficient fix to the debt problems afflicting not only Greece, but also Portugal, Ireland, Spain and Italy? The credit rating agencies, the same people who got paid by private bankers not to scrutinize the sanctity of their investments back in the real estate bubble, yet who apparently see no angle in looking away this time.
In an interview with Politico's Morning Money, David T. Beers, head of sovereign ratings at Standard & Poor's, now puts the odds of a downgrade to American creditworthiness at 50-50. Moreover, Beers warns, such a move could come even if the White House and Congress manage to craft a deal to lift the debt ceiling before August 2.
If the agencies downgrade American debt to a notch below AAA, that could trigger panic in the global market. Some pension funds and other pools of money may be forced to sell their Treasury bonds, owing to obligations that they stick to investments that have the full seal of approval from the credit rating agencies. If the pension funds sell, that should push down the value of the dollar, which would force the Treasury to hand out higher rates of interest to find takers for its debt, which would eventually filter through the broader economy as higher interest rates, making it harder for people to finance homes and cars and stay current on their credit card balances.
And if United States debt no longer looks as solid, that is likely to cast a shadow on other debt in the global financial system, likely jacking up the rates that strapped governments in Ireland and Portugal and elsewhere must pay to find takers for their bonds, intensifying the pressure in Europe.
If this were 2006 and Goldman Sachs were paying the credit rating agencies for their opinion, one can reasonably imagine that they would find a reason to conclude that no downgrade would be required, enabling the libations to keep flowing. But suddenly the credit rating agencies seem inclined toward sobriety, studying the numbers at issue while taking a more conservative tack.
It has been said that virginity is something that cannot be regained, but the credit rating agencies are apparently intent on testing that proposition. For better or worse, their judgements carry greater weight than ever, as the rest of us wait to see whether another calamity is about to unfold.