THE BLOG
08/08/2011 04:41 pm ET Updated Oct 08, 2011

Are Rating Agencies Acting in the Name of God?

Standard & Poor's tried to justify its decision of the downgrading of the note of the United States through a press conference run by Ayatollah David Beers, the head of S&P's sovereign ratings, the supreme judge of the conduct of nations, attending -- as Lloyd Blankfein, the CEO of Goldman Sachs -- to God's work.

It confirmed the loss of sense of reality and measure of the rating agencies in the sovereign crisis that spread in Europe, as well as the recent debate on the increase of the debt ceiling of the United States.

There is something fundamentally wrong in the rating agencies' approach to sovereign ratings: they unilaterally redefined their role several years ago from doing their job -- assessing the ability of sovereign issuers to service their debt -- to rating countries.

It is that decision that completely changed the impact, and the credibility of the rating agencies. In the name of God, they started to act as judges of countries, their political systems, their social policies and intervened in politics and even the elections in many countries, assessing in a partisan way the programs of the political parties.

While doing that, they failed to perform their jobs: they completely neglected their mission to adequately rate complex debt instruments such as structured products and bear a huge responsibility on the financial crisis that led to the collapse of Lehman in 2008. Even their assessment of the debt of financial institutions was wrong. They downgraded them brutally and too late.

Are they trying to find a new mission? They should definitely review it, but not the way they did it. The world and investors do not need to now what Ayatollah Freeman considers as a "debacle" (i.e., the way Congress handled the debt-ceiling problem). Criticizing the consensus building -- or lack thereof -- of the U.S. Congress is none of their business. That is a political opinion, not an assessment of the U.S. sovereign debt.

Nothing has worsened the situation since their previous warning. Congress actually is now going to prepare a drastic reduction of government expenses. It is the right thing to do.

Last weekend's decision provided an increase of the debt ceiling that will allow the U.S. not to be in default. That restored confidence in the market to the point where the Bank of New York Mellon decided to quote some fees for deposits over $50 million because U.S. treasuries at some point had a negative yield. Some buyers of U.S. Treasuries were prepared to pay to receive what they considered to be a safe placement.

They destroyed that in a short and subjective matter that, compound with the fact that they are unaccountable, makes it dogmatic and undemocratic. Rating agencies have indeed acted under the "freedom of press" cover to avoid being sued despite their gross negligence in some matters. The Dodd-Frank Act of 2002 changed that and made them accountable: for six months they refused to allow their ratings to be published, in order to assess their potential legal liability, forcing the SEC to suspend the obligation of ratings for several months. Rating agencies are fundamentally irresponsible and not accountable for their ratings.

After the despicable hearings of the leaders of the rating agencies during the financial crisis, it is time for Congress to call them back and make sure they no longer can do what they just did: provide political ratings.

They have outlived their usefulness. Underwriters, investors or traders to build their own opinion, assisted by a truly professional country risk analytical firm, are perfectly capable to make that assessment.

As Deven Sharma, President of S&P, told The Wall Street Journal, "[W]e are moving in uncharted territories." The answer from Paul Krugman in The New York Times is unequivocal:

On one hand, there is a case to be made that the madness of the right has made America a fundamentally unsound nation. And yes, it is the madness of the right: if not for the extremism of anti-tax Republicans, we would have no trouble reaching an agreement that would ensure long-run solvency.

On the other hand, it's hard to think of anyone less qualified to pass judgment on America than the rating agencies. The people who rated sub-prime-backed securities are now declaring that they are the judges of fiscal policy? Really?