Outlook: One of the most remarkable survivors of the credit crunch has been the credit ratings industry. Despite getting the banking crisis so spectacularly wrong – toxic CDOs rated as AAA anyone? – Standard & Poor's, Moody's and Fitch were not among the financial institutions which blew up.
That, of course, left them free to carry on analysing the creditworthiness of companies and countries – such as Greece and Portugal which were downgraded this week by S&P. Cue the chaos we have seen in recent days.
It's pretty galling that the world's financial system is at the mercy of organisations with the track record of the credit ratings agencies (the banking crisis was just the latest disaster the industry didn't see coming till it smacked them in the face). But the argument has always been that this system needs independent arbiters of creditworthiness, applying consistent standards across the organisations they rate.
Since the credit crisis, governments on both sides of the Atlantic have introduced new regulation with the aim of improving standards at the ratings agencies. Now the European Union may be about to go a step further. Guido Westerwelle, the German foreign minister, says he is pursuing plans to create a new European ratings agency.
In part, Mr Westerwelle is having a dig at the Americans – bad enough that the ratings agencies are so powerful, even worse, they're all from the US. But he also wants an institution with no conflicts of interest – there has been concern about the financial products offered by the agencies and the fact that they are often paid by the institutions that they rate.
It sounds like sensible stuff. The suspicion remains, however, that the credit ratings failures we have seen in recent years have been a question of madness not badness. That is, rather than having their judgement clouded by commercial concerns, the people working at these agencies just did not have the competence to make the right calls. If so, cleaning up the business, even with a brand new European institution subject to tight controls, might not improve its performance. It may just need better quality people.
We should also remember that ratings agencies are only powerful because we invest so much in what they say. If they've got it so wrong so often in the past, why do we continue to hang on their every word?
The answer may be that it is convenient to have someone else to blame during financial crises, particularly if you're an investor – in CDOs, sovereign debt, or whatever – who is too lazy or dim-witted to make your own judgements about the creditworthiness of what you're buying or who you are dealing with. The credit ratings business survives, in part, because it lets the rest of us off the hook.