Take your pick on how you want to diss the dealers of ratings respectability. You could suggest similarities to the likes of Arthur Andersen, on the take from the very same clients about which they're supposedly providing objective analysis. Or Boss Hogg and Sheriff Rosco P. Coltrane, always one bumbling step behind the shenanigans of the Duke brothers. Or the IRS or some other bloated, hungry bureaucracy, grabbing more power only because it can, only because power is the justification for its continued existence.
Convincing cases can be made for all three analogies.
For starters, take the first: impropriety. With the current business model, it's way too easy to imagine a scene, in a glass and mahogany executive office on the 28th floor, where Mr. Big Pants Insurer slams his fist on his desk and demands, "I shell out millions of dollars for the 'honor' of being rated, so you better give me what I'm paying for or else I'm going to take my business elsewhere." The rater then kneels, bows his head and crawls back out of the office.
Sure, rating agencies might not kowtow like this, but why continue to leave open even the possibility of this incrimination? Why open yourself up to the SEC investigating whether such corruption had a hand to play when it comes to collateralized debt obligations and the subprime crisis?
Speaking of the mortgage implosion, it's been said that another reason the raters were rankly wrong is because they simply failed to understand the CDOs they were analyzing. Hell, Moody's is one of the people saying this, about itself. The same can be said, and has been said, in the insurance space.
Earlier this year, for instance, insurance bossman William R. Berkley rammed home these points during a public speech. On the topic of raters' intelligence, Berkley said (and I'm loosely paraphrasing him here) that he wouldn't hire them to clean his office toilets, let alone be on the A-Team in his accounting department.
The truth, it seems, is that insurance companies have swooped in offering living wages and taken for their own any and all talent the ratings agencies might have once had. That leaves the raters with folks on par in ambition and capability with, say, the average government worker.
Which brings me to my next point. How much scarier is it that the ratings agencies in the insurance space now wield the power of a midsize European country's bureaucracy? That's really what Berkley and other old heads of his ilk bristle at--these petty little ratings agency tyrants telling them--them!--how to run their businesses, and having to pay these numbskulls to do so (their words, made up by me).
Plenty of anecdotes are out there to this effect. Raters forcing carriers to sweat through 33-hour meetings, after which they command: "Cut those 10,000 accounts. Who cares if they're profitable? In the next 1,000 years, they might get hit by an earthquake, and we don't like them!" Or, "You do not capitalize the E,R and M in your official company policy statements. Your risk management doesn't meet our standards. Downgrade for you!"
Faced with this criticism, as would be expected, ratings agencies get as defensive and hurt as if you were blaming a mother for the 40-year-old son living in her basement. Especially so on that last count. Raters deny that they are de facto regulators. They cry victim, saying they've been put into this position by market forces. As one rater told me recently, "We can't force people to have ratings!"
But as much as they might try to hide it, ratings agencies, one suspects, derive some glee and self-importance from their ever-increasing prominence and power. Look to the way they set up press conferences at the Rendez-Vous de Septembre this month in Monaco--usually geared to get the maximum impact from the news of a massive downgrade. Just imagine Boss Hogg's reaction if he would have ever caught Bo and Luke.
September 1, 2008
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