Behind the lines at acredit rating agency
It's eerily quiet... more reading room than boiler room, and staff despise their jobs. But the global markets are in fear of them. Nick Loxham explains why
Wednesday 07 December 2011
I started work in Moody's European High Yield team at the start of 2011 and thought that I had finally arrived. A position at Moody's would allow me to exert some influence – at least until I did what everybody at the rating agencies secretly wants to do: got a job in a bank.
The global markets rely on the rating agencies. Investment bankers receive bonuses that depend on the agencies' pontifications. Ostensibly intelligent and highly paid fund managers will stay in the office all weekend to re-model their own funding prospects simply because one of the rating agencies decided to "notch", or change, the fund's rating downward.
The collective knee trembling doesn't stop at the markets. National governments fret if they so much as think that an agency might put their instrument or institution on "watch" and, depending upon the government, world markets would probably react too.
Not only that, but international banking regulators actively recommend that banks across the globe link their capital ratios to the agencies' credit ratings on certain types of security (as stipulated by the Basel Committee on Banking Supervision).
Furthermore, companies actually have to pay the rating agency for these hallowed ratings, and if a company decides not to, the agency doesn't rate the security and nobody in the market is interested because it doesn't come with the seal of approval (or disapproval as the case often is these days – Moody's especially is trying to undo some of the damage done when they told the world in 2007 that the toxic mortgage-backed securities were as safe as US government debt).
On the first training event that I attended as a Moody's employee, we were treated to a couple of guest speakers from Barclays Debt Capital Market's desk, who let us lowly associates know exactly how important our ratings were when Barclays was raising capital for its all important fee-paying clients.
In between the discreet checking of his Blackberry, Barclays no. 1 let slip that they would shop around for the best rating among the three agencies (Moody's, S&P, Fitch) before taking the bond to market with the best of the two, if the three ratings differed.
I had at this time been at Moody's for about five months, but I hadn't failed to notice that I was surrounded by "normal", slightly dour-looking analysts and vice presidents that were constantly awarded with sycophantic praise and snivelling obeisance by the world's financial markets.
The rating agency conundrum has always struck me as rather peculiar. Who are these people and how did they come to exert so much power? Are these places filled with what Michael Lewis called 'Big Swinging Dicks' (or more aptly, since Moody's was 50 per cent women, 'Big Swinging Tits'), inebriated with power, and bursting in on boardroom meetings with the week's list of 'notches'?
Unfortunately, the reality is more mundane. My floor, on the whole, was eerily quiet. More reading room, than boiler room. The staff at my level, as with most of the City-firms that I have worked in, despised their jobs. Most of us too had 50,000 more reasons – each year – than our friends in the banks to hate what we did.
The rating agencies don't pay bonuses, or at least not the ones that award anybody "intelligent" enough to be able to work a desktop spreadsheet application, with enough to buy the latest prancing horse cabriolet. Our reward is the power trip. The knowledge that when we talk, people listen; or more accurately, when we do the dog work and our superiors talk, people listen. It is these analysts at the rating agencies that move world markets.
Hours spent plugging numbers into an internal model are followed up by meetings (called rating committees) where participants discuss the final decision before publicising it to the world. The process ends with the markets' gyrations.
Yet I was told by a Moody's big cheese (who used to work at Lehman Brothers) that in most cases the bond markets react to news – good or bad – much quicker than any of the rating agencies. The same presentation included a graph of the Enron episode with the basic explanation that, if the markets didn't see it coming, then how were we to know? I found the overall outlook at Moody's to be summed up in a question and answer in a training event in my first week there. 'How did we get it so wrong in the financial crises of 2007/2008?' The lecturer shrugged: 'I guess we just got it wrong, huh?'
In a climate where everybody has an opinion but nobody knows quite was is going on, why do we continue to put so much faith in a collection of ordinary people that happen to work at a rating agency? In places like Europe and the US that profess their membership of free-market capitalist economies, why do we allow the agencies to yield the ability to control the world with a simple press release. 'Notch', 'Upgrade', 'Downgrade', 'Watch'? Not since Orwell's Newspeak did words with such brevity wreak so much havoc.
The writer is using a pseudonym
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