With a single statement, a bond rating agency can determine the fate of an entire country and possibly the entire global economy. When Standard and Poor's downgraded Greece's bond status to "junk," one of the oldest civilizations in the world was sent to fiscal purgatory. Now as Spain, Portugal, Italy, and Ireland await their fiscal destiny, we have to ask, who are these bond raters and how did they get so much power?
Huge Profits for Bad Performances
Let us first recall that these bond raters, Moody's, Standard and Poor's, and Fitch, are the same agencies that gave piles of subprime mortgages the highest ratings even though these securitized mortgages were about to tank. Moreover, these public companies are paid by the same companies that they rate, and it appears that they receive very little oversight. The result of this system is that although they have often made huge mistakes in their predictions and analysis, they have been raking in record levels of profit. In the first quarter of 2010, Standard and Poor's brought in $451.5 million, up 15 percent from a year ago. Meanwhile, Moody's first-quarter profit was $113.4 million.
Rating Universities
Not only do these agencies rate countries and businesses, but they also rate universities, and a careful examination of their rating reports shows that their seemingly neutral analysis is often full of neoliberal beliefs. For instance, in Moody's latest rating of bonds for the University of California, the UC is warned that its financial status could be undermined by:" high susceptibility to regulatory and government pay or changes, coupled with unique stresses on California health care, including unionized labor." In other words, the raters reveal their distaste for state regulation, unionized labor, and employee benefits, like health care. Like the IMF, Moody's signals that if the university wants to continue to be able to borrow at low interest rates, it will have to accept the neoliberal strategy of fighting governmental regulation and resisting employee unionization.
Moody's has also informed the UC system that it should stop relying so much on the state and should move away from its traditional stress on accepting students from California: "In-state demand is so strong that UC does little recruiting of freshman from out-of-state. Moody's views this as an untapped strategic asset because UC could easily increase its student demand further if it followed national recruiting practices similar to most peer universities." Not only does Moody's think that the university should accept more out-of-state students, but it should spend more money on marketing and recruiting.
One reason why it is likely that the UC system, like so many other institutions, will follow advice of the bond raters is that the University of California has taken on so much debt that it is has become addicted to low interest rates: "debt outstanding has grown from $8.3 billion in FY2006 to over $13.2 billion in FY2009 and including new borrowings since the end of the fiscal year, a 56% increase." Since the university cannot stop its many construction projects, even as it cuts salaries, lays off faculty, and increases tuition 32%, all it can do is to continue to borrow more money, and in order to borrow at a low rate, it must please the bond raters.
It appears that no public or private institution can escape from the control of the bond raters. From small towns to large countries, everyone relies on borrowing so much money that they must march to the tune of the raters who always threaten to lower the ratings if the borrowers do not do things like shed jobs, decrease benefits, fight unionization, and resist governmental regulations. We can only hope that the U.S. Congress gets serious about its threat to rein in the raters.
The poor rating for the UC system is related to the fact that they have 1. state funding from a state with a large fiscal crisis (I doubt anyone can argue that) and 2. union employees are due higher pension payments and this is a form of "off-balance sheet debt" It's hidden debt because for a worker who is 45, the UC system doesn't need to make their pension payments, but once they retire they will receive these payments until they die.
Are you using UC as an example of a good system? Few others would.
They got so much power because we went into so much debt.
Public, private, all of it. That's what bonds are, debt.
The more debt we use, the more bonds issued, the more Wall St and the rich own us.
I don't know how to end debt, but debt is the problem, not bond raters.
But for any reader who hasn't stumbled upon it...this little explanation goes a long way I think.
http://video.google.com/videoplay?docid=-2550156453790090544#
(for the critiques and whiners I have only one response: When was the last time this issue was discussed in depth in the mainstream media ? --...-- right. )
" ... "
It was, and it is, in other words, the perfect instrument of ... EXTORTION.
Meanwhile, when their cohorts wanted to float issues of known-to-be worthless bonds, the ratings agencies (for a price...) complied, knowing that people would interpret their pronouncements as Gospel even without checking the (utter and complete absence of) facts.
It was, and is, in other words, the perfect instrument of ... FRAUD.
But, even to this day, we don't hear "crime words" being used. We watch public officials throughout the system, from the highest to the low, rushing to the defense and protection of everything that was done.
It was, and it is, in other words, the perfect instrument of ... BRIBERY.
Disaster Capitalists.
They also need an a.k.a. "Government Raiders"