Michael Lewis, in his highly entertaining new book, The Big Short, has a pop at ratings agencies (amongst a bazillion other targets). All the big Wall Street firms, he writes, were highly effective at manipulating Moody’s and Standard and Poor’s:
Everyone on Wall Street knew that the people who ran the models were ripe for exploitation. ‘Guys who can’t get a job on Wall Street get a job at Moody’s,’ as one Goldman Sachs trader-turned-hedge fund manager put it.
Inside the rating agency there was another hierarchy, even less flattering to the subprime mortgage bond raters. ‘At the rating agencies the corporate credit people at the least bad,’ says a quant who engineered mortgage bonds for Morgan Stanley. “Next are the prime mortgage people. Then you have the asset-backed people [dealing with sub-prime mortgages, for the most part], who are basically like brain dead.
Wall Street bond trading desks, staffed by people making seven figures a year, set out to coax from the brain-dead guys making high five figures the highest possible rating for the worst possible loans. They performed the task with Ivy League thoroughness and efficiency.
Despite their pivotal and disastrous role in the financial crisis, business for the ratings agencies is booming. If anything, their influence, meanwhile, has grown, especially over governments, as they threaten countries with a sovereign debt downgrade.
I was especially intrigued by media coverage for a recent report from Moody’s, which claimed that the US, UK, Germany, France and Spain are all at risk of social unrest as governments struggle to get their finances under control. According to Moody’s Chief International Economic and Financial Policy Analyst, Pierre Cailleteau:
Growth alone will not resolve an increasingly complicated debt equation. Preserving debt affordability at levels consistent with AAA ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion.
We are not talking about revolution, but the severity of the crisis will force governments to make painful choices that expose weaknesses in society.
Strong stuff. And interesting too. One of the key questions for the next few years is whether the fallout from the financial crisis will be toxic enough to damage, or even break, some societies.
So I thought I’d read Mr Cailleteau’s report, rather than just relying on the Telegraph’s summary. I wondered how strong his analysis was. Was he a smart guy or one of those dubbed in Lewis’s book as the ‘brain dead’?
But then I hit the buffers. Go to Moody’s website and there’s no content at all available unless you register (which includes pretending to read a 6103 word user agreement – the site knows if you haven’t at least scrolled through it).
Once I’d gone through all this rigmarole and logged in, I was told that access to Cailleteau’s report “is not part of your current service”. (I was allowed to read the report’s press release. Big deal. I struggle to think of another organisation that requires registration for that.) Nor could I find a biography for Cailleteau. Only one of his reports was freely available to subscribers (a research note on methodologies). And even the link to pricing information for his ‘social unrest’ report was not working.
So I am left none the wiser about Cailleteau’s argument or credentials. All I do know is that he dismissed talk of a systemic global banking crisis in August 2007, a year before [corrected] Lehman’s nearly brought down the world’s economy.
Of course, anyone can make a mistake (though that one’s a doozy) – but surely it is no longer acceptable for the ratings agencies to hype their work to the press and lord it over the world’s economies, without letting us see the evidence on which they base their diagnosis and prescriptions.
More transparency please. Either on a voluntary basis. Or enforced through regulation.
