Moody's, Standard and Poor's (S&P), and, to a lesser extent, Fitch raked in billions of dollars during the wild prelude to the financial crisis of 2007-2008, which imploded the world economy.
Matt Taibbi, writing at the time for Rolling Stone (June 19, 2013), stated bluntly, "...we now know that the nation's two top ratings companies, Moody's and S&P, have for many years been shameless tools for the banks, willing to give just about anything a high rating in exchange for cash." Between 2002 and 2007, fees for the "Big Three" credit ratings agencies (CRAs) doubled from $3 billion to $6 billion.
For example, in 2001, Moody's had revenues of $800.7 million; in 2005 they were up to $1.73 billion, and in 2006, $2.037 billion. By February 2007, Moody's stock peaked at more than $72 per share.
As McClatchy Newspapers revealed in 2009, the biggest shareholder in Moody's since late 2001 is billionaire Warren Buffett's Berkshire Hathaway. McClatchy's Kevin G. Hall wrote that Buffett's 15 per cent stake in Moody's, "largely still intact [as of 2009], meant that the Oracle from Omaha reaped huge financial rewards while Moody's overlooked the glaring problems in pools of subprime mortgages."
Readers may recall that another Berkshire Hathaway billionaire, Charlie Munger, said it was proper to bail out Wall Street, but the millions of people facing home foreclosures should "suck it in and cope."
Buffett owned 48 million shares in Moody's in 2009, but more recently he has been lowering his stake in the company. That's because the EU is imposing a new regulator and some restrictions on the CRAs.
According to the Financial Times (Nov. 27, 2012), "Moody's faces a ban on rating [investment] products issued by Warren Buffett's Berkshire Hathaway in an EU clampdown on alleged conflicts of interest at credit rating agencies...the European parliament and EU member states agreed [on] a draft plan to impose limited curbs on the sector that restrict when agencies can rate [on an unsolicited basis] sovereign debt and [that] give investors clear grounds to sue for gross negligence. One measure would force agencies to abstain from rating [investment] products associated with their big shareholders. The ten per cent threshold means that the curbs would be triggered by Berkshire Hathaway's 12.75 per cent stake in Moody's."
The FT writer called this "the most far reaching attempt yet by Brussels to bridle an unpopular industry that some European leaders have blamed for aggravating the sovereign debt crisis with erratic and 'subjective' rating decisions."
Heavy lobbying by the CRAs ended or delayed any such reforms in the U.S. and North America. That leaves a bizarre conflict of interest situation, especially in Canada.
Conflict of interest
For the last few years, Buffett has been shifting his investments toward energy and utilities, though readers may recall that in 2013, Buffett and fellow billionaire Jorge Paul Lemann of 3G Capital bought up H. J. Heinz for $23 billion and then announced they were closing the Leamington, Ont. processing plant (and two others) because it was "unprofitable." The announcement shocked the community and added to the steady loss of manufacturing jobs in Ontario.
Then in May 2014, Buffett's Berkshire Hathaway Energy announced a $3.2 billion deal to buy SNC Lavalin's AltaLink, whose electricity transmission infrastructure serves more than four-fifths of Alberta. Buffett already owns oil-by-rail giant BNSF Railway (profiting greatly from tar sands crude shipments), power grids in the UK, electric utilities in several states including Oregon and Nevada, natural gas pipelines that stretch from the Great Lakes to Texas and 17.8 million shares in Suncor Energy Inc.
It sure looks like Buffett intends to be a major player in the Canadian energy-export corridors planned by the corporate sector. At the annual convention of the Edison Electric Institute in June 2014, Buffett told the crowd that he intends to expand his energy/utilities business "as far as the eye can see."
As I recently wrote in rabble.ca, in April 2014 "the Ontario Liberal government appointed Bilderberg Steering Committee member Ed Clark (President/CEO of TD Bank Group) to lead a five-member council that will consider options to 'optimize the full value' of provincial assets such as Ontario Power Generation (OPG) and Hydro One -- potentially privatizing key electricity transmission and distribution assets," which would be a boon to the private sector's planned energy export corridors. In a bizarre revelation that falls into the everything-is-rigged category, Canadian Press recently reported that the "president and CEO of Infrastructure Ontario, the provincial agency that will take the lead on the sale of government assets, is Bert Clark, son of Ed Clark," chair of the advisory committee on asset sales.
It's rather obvious that Warren Buffett would like to buy Ontario's key transmission and distribution assets, making a matched set with his Alberta deal. If Moody's were to downgrade Ontario's credit rating, that would push things along more quickly -- especially with Canadian right-wing pundits clamoring for full privatization. But with Buffett still its biggest shareholder, Moody's may be wondering just how far it can go with such a glaring conflict of interest.
Will one of the other CRAs do the downgrade instead? Stay tuned.
Meanwhile it's interesting to consider what happens to a government that simply ignores the CRAs. In Stephen Harper's case, nothing.
According to Ralph Goodale, by 2006 Canada had been "deficit-free for nearly a decade." But after Harper took office, "He overspent by three times the rate of inflation and put this country back into the red before the recession arrived in 2008. And that made dealing with the downturn much more costly. At the bottom line, the Harper regime has created more than $150-billion in new federal debt."
In February 2012, the Harper government was musing aloud about cutting $24 billion in spending during the next three years in order to "deal with the deficit" (that Harper himself had created). Both Moody's and Fitch told the Wall Street Journal that the cuts weren't necessary, could have "negative effects," and could be a risk to growth. A Fitch analyst even said, "You don't have to swallow an extremely bitter pill if you are not sick."
Was there a huge outcry from the pundits demanding that Harper follow the CRAs' advice? In Canada, I could find only two news items that mentioned the WSJ article. The Harper government then passed two omnibus budget bills in 2012, both filled with bitter pills for people all across Canada.
Obviously, Moody's and the other CRAs depend on media pundits for much of their power and influence, like the bogeyman conjured by scolding parents. Otherwise, they become just another "opinion," as is gradually happening in Europe with its reforms of the ratings sector.
Read part one and part two of Joyce Nelson's Debunking the Bogeyman series here.
Joyce Nelson is an award-winning freelance writer/researcher and the author of five books.
Photo: flickr/OTA Photos
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