Residuos ganaderos 63

Senator Joe Lieberman describes the power of CRAs as simply government-conferred power (in Kruck, 2010). Lieberman’s view now coincides with an increasing number of academics, politicians and civil society representatives who argue that CRAs’ power is primarily, if not solely, the result of their regulatory use—termed the regulatory license view (Bruner, 2008; Abdelal, 2007; Kerwer, 2001; Partnoy, 1999). According to Bruner (2008), CRAs’ power today ultimately derives more substantially from state endorsement of their decisions. For Kerwer, “regulatory enforcement is the key to the rating agencies’ power, and not their pivotal role in financial markets, as is commonly assumed” (Kerwer, 2001, p. 3).

These theories generally point to an obvious flaw in reputation arguments. Despite the continual

failure of the CRAs’ risk assessments – as seen in the Asian financial crisis,37 the Enron collapse,38 and the US

Subprime Crisis – the use of credit ratings has nonetheless increased. This, as Frank Partnoy (1999) argues, means that the influence of rating agencies cannot be considered solely an outcome of their reputational legitimacy. There have been consistent and significant blows to the rating agencies’ reputations with no corresponding decline in their business. Rather than being dependent on their reputational capital, rating agencies are now dependent on selling compliance with regulation. “Credit rating agencies have not survived for six decades because they produce credible and accurate information...[they] have thrived,

37 _{The agencies were accused of both failing to predict the crisis, as well displaying pro-cyclical behavior—that is}

aggravating the financial crisis by under-rating Asian countries, thus increasing their costs of borrowing and causing increasing amounts of capital flight (Ferri, Liu & Stiglitz, 1999).

38 _{Enron, one of the largest energy companies in the US, was rated investment grade by the three main CRAs four days}

profited, and become exceedingly powerful because they have begun selling regulatory licenses, i.e., the right to be in compliance with regulation” (Partnoy, 1999, pp. 713-714).

Deriving largely from its simplicity, this view has gained considerable support within civil society and governmental organizations; it is significantly altering how governments and NGOs have proposed to reduce over-reliance on credit ratings. Thierry Philipponnat, Secretary General of Finance Watch, responds to a question of how to reduce over-reliance on credit ratings:

There’s a very simple solution. It’s to permit investors to follow the rating agencies’ opinions without being obliged to. We’re in an absurd system today in which, once an agency’s opinion is given, the investor is obliged to follow that opinion. Why? Because the ratings are in the financial regulations. So we have to get rid of all reference to the ratings in the rules so investors can follow the ratings if they want to. They are free to – fine – but are not obliged to. That’s really the key. (Euronews, 2012)

As a result of CRAs being implicated in the US Subprime Crisis as well as the current European debt crisis a number of government regulatory agencies and NGOs have followed this simple solution (Kruck, 2010; IMF, 2010). In October 2010 the Financial Stability Board (FSB) released its “Principles for Reducing Reliance on CRA Ratings”. Reducing reliance on ratings, they argued, will “reduce the financial stability— threatening herding and cliff effects that currently arise from CRA rating thresholds being hard-wired into laws, regulations and market practices” (FSB, 2010, p. 1). References to ratings should “be removed and replaced” and “alternative definitions of creditworthiness developed” (FSB, 2010, p. 1).

At the national level the US led the charge with the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act and the 2010 Financial Sector Reform Bill. Christopher Cox, the Chairman of the SEC, captured the prevailing sentiment within the government: “The official recognition of credit ratings for a variety of securities regulatory purposes…played a role in investors’ over-reliance on CRAs” (Cox, 2008). Accordingly, the bills sought to remove all regulatory references to credit ratings; they required all federal agencies to “remove references to or reliance upon credit ratings and substitute an alternative standard of creditworthiness” (in IMF, 2010, p. 95). Following the US example, in 2011 the European Union (EU) established the European Securities Market Authority (ESMA), which was mandated with regulating the

activities of the rating agencies. The EU Parliament’s Economic and Monetary Committee subsequently issued draft legislation that stated that “all regulated financial institutions, such as banks, insurance companies, and investment fund managers, would be required to develop their own rating capacities, to enable them to prepare their own risk assessments and thus not rely entirely on external ones” (European Parliament, 2012).

The regulatory license view provides an over-simplified and limited conception of CRAs’ power. These critics suggest that modern ratings are being used in the private sector because they have been given widespread regulatory standing, but this is historically inaccurate: wide-spread private use of ratings preceded public regulatory sanctification (Carruthers, 2013). Their view fails to incorporate both wider structural changes in global financial markets as well as various social dimensions of CRAs’ power. Despite the implementation of legislation designed to remove all references to credit ratings in regulations in 2010, CRAs continue to play a significant role in financial markets; the total profits of all registered NRSROs went up from $3.7 billion in 2011 to $4.2 billion in 2012 (SEC, 2012). In addition, the non-regulatory use of credit ratings is far more significant than implied by the regulatory license view. While regulations required investors to purchase securities rated by one agency, investors consistently favor securities rated by two or three rating agencies over those rated by one agency (Hill, 2009). Thus, while regulations require that one rating be obtained, most debt issuers as common practice seek two, if not three, separate ratings (Langohr & Langohr, 2008).

One of the most significant uses of credit ratings has been their use in private contracts by a number of mutual funds, pension funds and insurance companies, among others. In 2002 Moody’s observed that 87.5% of companies whose debt was rated Ba1 or above reported they had rating triggers incorporated into financial contracts (Parmeggiani, 2012). The use of rating triggers – which are contractual provisions incorporated into financial contracts that force borrowers into certain actions following a change in their ratings – have recently gained considerable attention due to the high-profile bankruptcies of Enron and Pacific Gas and Electric Company. In these high-profile cases, when these companies were downgraded they began facing dire liquidity problems because their required payments to lenders increased and their

credit availability dried up. This was not the result of governmental regulations, but because of the pro- cyclical effect of the rating triggers. Indeed, rating triggers also played a role in the collapse of AIG, whose over-the-counter (OTC) derivatives trade was regulated by rating triggers contracts. As long as AIG’s financial products maintained AAA ratings they were not required to post collateral. But after the first downgrade (in 2005) they had to start posting. As the crisis unfolded their mounting collateral posting requirements, coupled with liquidity strains, become unsustainable (IMF, 2010).

Another example of the non-regulatory imposed use of credit ratings is in sovereign governments. Most of the world’s governments now hold a credit rating. Additionally, a number of governments with no intention of even issuing bonds have sought a credit rating. This group of governments is now in fact driving the growth in sovereign credit ratings (Bruner & Abdelal, 2005). The United Nations Development Program (UNDP) is now encouraging developing countries to obtain credit ratings as a form of poverty alleviation. The UNDP argues that by helping countries integrate their economies into mechanisms of global finance markets, this provides transparency and encourages confidence for investment (in Muhlen-Schulte, 2009). Governments have not been coerced through threat of regulatory sanction to gain a credit rating. Credit ratings are something governments have sought out, even promoted. The power of CRAs must therefore not be conceptually limited to their incorporation into regulation.

The fact that governments have sought credit ratings does not remove questions of power from the equation. Some have misperceived the shift away from structural adjustment policies as meaning that power is now absent in global credit markets. Power has not been removed; it has merely changed form. This type of power is not coercive; rather, it is in line with Foucault’s notion of governmentality—it operates through “a complex set of instruments, institutions and knowledge that normalise particular behaviours, actions, and ways of thinking” (Haarstad, 2012, p. 83). As Sinclair argues, “a view of rating simply as a coercive force does not capture the whole story”; consideration, he argues, must also be given to the way a rating “shapes, limits, and controls, often in connection with the generation of authority–rather than the brute application of power” (2005, p. 10).

Conclusion

This chapter has argued that CRAs’ power is not solely a private construction. Governments have played a significant role in empowering these institutions by incorporating credit ratings into market regulation. In asking why governments have chosen to incorporate these ratings, three aspects were

highlighted: the so-called inability of public regulation to keep up with the private sector, a purposeful effort by states to avoid domestic political responsibility in an inherently unstable period of financial capitalism, and a means to embed neoliberal economic reforms. The main point is that discourses of private power are not necessarily privately constructed. States can greatly benefit from the idea that private actors have surpassed their regulatory capabilities and rendered them obsolete in an age of global capitalism. Finally, the idea that the power of CRAs is solely an outcome of their regulatory incorporation was criticized. If states seek out or even promote credit ratings then we must look at not only the coercive aspects of CRAs’ power, but also the ways in which they are able to generate authority and consent for their expertise. The next two chapters will therefore explore the social dimensions of CRAs’ power.