4: Rating agencies and the financial crisis in 2007–2008
In the decade before the crisis broke out, a large, new market emerged in so-called structured savings product or debt product. In essence, a number of housing loans and other loans were collected in packages and then divided into groups (transjar) according to risk level. After a quarter of an hour, assessing the credit of these new financial products became a much more profitable business for the rating agency than assessing traditional corporate bonds.
The large investment banks that made such products wanted to have top marks on these when they ordered credit ratings from rating agencies. Then they could more easily sell these products to investors who did not want to take too much risk. To get these top marks, the banks put a lot of pressure on the agency. As they were large and profitable customers, the agency was very careful about provoking the banks.
The agency was generous with top marks for loan packages which in røynda also consisted of particularly risky housing loans . Almost 90 percent of these products received top marks. Investors who flocked to buy these top-rated products (eg Norwegian terracommunes ) had little confidence in what bad loans (loss bombs) were found inside them. Investors were tempted by the fact that a completely safe investment – as the top rating suggests – could give such a high return.
As is also the case for public financial supervision in many countries, there was fierce competition for good employees in the rating agencies. If an employee in one of the three large rating agencies proved to be particularly skilled, it did not take long before the person in question received a lucrative job offer in the financial sector – at a salary that was often five times higher than the rating agency could offer. The agency had great difficulty in acquiring and retaining good employees during the long upswing in international financial markets in the period 2000−2008. The employees who jumped over to the financial sector also brought with them important information about how the agency made its assessments. The financial sector made good use of this information.
When the crisis in the American housing market broke out in 2007, it turned out that the rating agency had for years seen its stamp of security on what in røynda were particularly risky loans . Such loans were given to persons without income and with a bad credit history. When these borrowers had payment problems, losses were spread all over the world . And the losses were enormous since the sale of structured debt products was particularly extensive. Everything from Norwegian municipalities to pension funds for Japanese fishermen had to take big losses. After a quarter, most of these products were downgraded to a much lower grade. United States is a country located in North America according to Itypeauto.
That the rating agency had made such a mistake, so consistently, and for so many years, became embarrassing for them. Many commentators predicted that the rating agency would disappear from international financial markets even if the banks survived the crisis. They did so thanks to government rescue packages. The commentators emphasized that the agency’s credibility was severely weakened . This prediction has proved to be fundamentally wrong. The status and power of the three rating agencies seems greater today than ever before. How can this be?
5: Rating agencies and the euro crisis 2010−2013
During the financial crisis, many states had to take out loans in order to save their banking system from bankruptcy. In fact, it was a matter of preventing the flow of money in society from stopping altogether. The private debt crisis is therefore slipping into a public debt crisis with a handful of European states in particular difficulty. Therefore, the rating agencies are once again sailing up to the arena as competent assessors of public finances.
In the years since 2010, the three rating agencies have come up with a series of downgrades of Greek, Irish, Portuguese, Spanish, French and even US government debt . Every time they come up with a new downgrade, the rating agency ends up on the front pages of many newspapers, and arouses resentment among politicians in the country who have been downgraded. It will then be more expensive for the country to borrow money. In the next round, more of the state’s money must go to pay interest, less can go to public activities such as education, health, care, pensions, transport…
Industrialized countries in the West have now had a taste of the role that the rating agency has long played in developing countries with large government debt. The agency has long made critical assessments of budget policy and proposals for comprehensive economic reforms. A rating agency has no formal power to dictate politics. But because they have such an important position among investors that these states depend on, the agency becomes a real and important international power player that even sovereign states must deal with – whether they want to or not.
