THE BLOG
05/26/2010 01:19 pm ET | Updated May 25, 2011

How the Bond Raters Took Over the World

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.