Fact and Fiction Behind Too Big to Fail
The U.S. government’s lawsuit against credit rating agency S&P hit many as it did me. It may have plenty of merit, but it appears to play a larger role in a huge, bipartisan charade. Our most powerful government officials would have the public believe that systemic risk has been vastly reduced. That isn’t true. They would like us to believe they are finally holding perpetrators accountable, but they want us to ignore other equally responsible players such as our regulators and the big bank CEOs. While what we really need most is government action to reduce systemic risk so that taxpayers don’t subsidize Wall Street’s riskiest trading, it’s more politics than justice at play here.
Rating agencies are an easy target. They were the first to appear in Congressional hearings after the bubble collapsed. It took the relatively independent work of the Financial Crisis Inquiry Commission to get the big banks’ CEOs their day in the public crosshairs.
Like all corporations, credit rating agencies don’t vote. So candidates for Congress don’t need to pander to them.
The rating agencies also do not donate huge amounts to Congressional and Presidential elections. According to The Center for Responsive Politics (OpenSecrets.org), the McGraw-Hill Companies, parent of S&P, gave $52,868 to federal level candidates in the 2011-2012 election cycle. That ranked them 4,416th among the 20,894 organizations tracked. (CRP gets its data from the Federal Election Commission.)
The Securities and Investments industry was the 4th largest sector donor to Congressional campaigns in the same recent election cycle, donating $37.6 million. Within that sector, Goldman Sachs contributed $7.8 million and Morgan Stanley $3.7 million. Foreign-based UBS contributed $2.4 million and Credit Suisse $2.3 million. They all shared the Top Donor Organization roster with hedge funds and a few private equity firms.
The Commercial Banking sector, ranked 11th on the top donors list, donated $15.4 million to Congressional candidates. The CRP data classifies JPMorgan Chase, Citigroup and Bank of America as commercial banks although they are major investment banks wrapped in the FDIC federal guarantee. JPMorgan Chase topped the Commercial Banking sector’s list of top contributors, having given $4.2 million to Congressional campaigns. Bank of America ranked third at $2.7 million and Citigroup fifth at $2.3 million. Foreign-based Barclay’s and Deutsche Bank also made appearances among this group.
McGraw-Hill’s donations were less than 3% of these biggest banks’ Congressional campaign contributions.
The lobbying group of all the many small, local banks providing traditional banking services, the Independent Community Bankers of America, also made the top organization donors list, contributing $1.4 million. Even pooling all their resources across the entire nation they couldn’t match a single one of the biggest banks. Many other large, nonfinancial corporations must envy the political clout over those who write our laws achieved through the financial largesse of the world’s largest financial institutions.
Enough about the money, which everyone I’ve ever met understands. Here’s the more subtle political strategy. Timing.
Why now? The role of the rating agencies and the damning emails that surfaced have been known for several years. It doesn’t take political rocket science to see that S&P was the first rating agency to downgrade the U.S. sovereign debt rating. The battles over the fiscal curb and looming longer-term fiscal cliff involve potential action on the U.S. credit rating. This legal action seems intended more to intimidate than to really prosecute those responsible.
Markets and hedge funds can hold opinions different from the rating agencies. The U.S. taxpayers’ interest cost on our growing debt burden would be better served by honest debate over the ability of the country to pay its bills.
Both rating agencies have been warning of a U.S. downgrade for years. Moody’s warned about the potential back in January of 2008, before the bubble collapsed. They followed up with a detailed study the following year.
Our Congressmen and federal officials want the rating agencies to be more forthright and honest about their assigned ratings going forward. Yet some of our top Congressional leaders aren’t being honest about our fiscal situation. We need the voice of the rating agencies, even if parts of them have been so discredited.
If one reads the Congressional Budget Office’s own reports on the Social Security program’s future, for example, one can learn two things. First, under current law, benefits can be paid only out of funds from the trust fund and annual social security taxes. The excess of Social Security tax receipts over outlays in recent decades have been loaned to the U.S. treasury to pay other bills. The Social Security program is now in an annual deficit and is redeeming these IOUs. Second, the CBO estimates the program will run out of money in the trust fund by 2034. They would be forced to cut benefits. Harry Reid and colleagues should read these reports and look a 45-year-old (who will retire around 2034) in the eye and tell him Social Security is just fine.
Moody’s, in its 2008 alert, stated specifically that “the U.S. is at risk of losing its top-notch triple-A credit rating within a decade unless it takes radical action to curb soaring healthcare and social security spending.” Congress has taken little action, much less radical action, on reducing the soaring costs of my retiring Baby Boom generation. Neither Presidential candidate tackled this issue. Is this a time during which we’d want our government to silence the rating agencies on the U.S. sovereign debt rating? As Moody’s pointed out five years ago, it takes a long time to turn a large fiscal ship like a country the size of the U.S. Let the legal system do its business. But why continue to silence intelligent debate only to wait for a borrowing crisis to wake up to reality?