Rating the Raters

In one way, it’s been a brutal time for the big bond-rating companies, which have struggled to defend their reputations since the good ratings they gave to bad bonds helped start the 2008 financial crisis. In another sense, they’re doing great; they’re busy and making piles of money. The U.S. regulators that made ratings by Moody’s, S&P Global and Fitch into a semi-official seal of approval in the 1930s may be trying to reduce their influence, but it isn’t working. The most sophisticated investors, on the other hand, are paying less attention to ratings than ever.

In October, Moody's said that the U.S. Department of Justice and several states were preparing to sue it, charging that it had inflated ratings on residential-mortgage bond deals before the subprime crisis. S&P in 2015 had paid $1.5 billion to settle similar charges. S&P had also reached a settlement with the U.S. Securities and Exchange Commission and the states of New York and Massachusetts under which the company was suspended for a year from rating securities in the biggest piece of the commercial-mortgage bond market and pay $80 million in fines. Regulators said S&P had set aside its usual methodology to win business in that market in 2011. The suits against S&P related to the subprime crisis were helped by e-mails like one from an S&P employee saying, “Let’s hope we are all wealthy and retired by the time this house of cards falters.” S&P charged that it was being unfairly singled out by federal prosecutors in retaliation for cutting the nation’s AAA grade in August 2011, but admitted in the settlement that it had no evidence to back that up. The 2011 downgrade of the U.S. had been ignored by the markets, as are many calls on government debt by all of the raters, including their downgrades of Japan and Italy in December 2014, just as investors had deemed the U.S. a better bet after S&P’s downgrade. One analysis found that since 1970, rating changes on sovereign debt have been ignored as often as followed.