Apologies for the polemical title, but a friend kindly passed along a Bloomberg story by Zeke Faux about the pricing power of the protected oligopoly of ratings agencies that, despite wreaking havoc on the global economy due to their incompetence, have only grown more entrenched in the years since the crisis:
West Haven, Connecticut, which has closed four school buildings over the past two years and fired 14 teachers to help cut its budget deficit, is about to pay Moody’s Investors Service almost double what it cost six years ago for a credit rating.
Joseph Mancini, finance director for the city of 55,000 near Yale University, says he has no choice other than to meet the demands of Moody’s after the municipality’s bonds were downgraded to Baa1 in January, three levels above junk, from A2.
“The market’s going to punish us for the rating we’re at,” Mancini said in a telephone interview. “If we didn’t get it rated, we would be punished even more.”
Four years after faulty ratings helped trigger the worst financial crisis since the Great Depression, Moody’s and Standard & Poor’s are as dominant as ever, boosting fees at a faster rate than inflation as new competition promised by lawmakers failed to materialize.
So where does Warren Buffett come in? Berkshire owns a large slice of Moody’s, and, as Buffett explained to the Financial Crisis Inquiry Commission, “there are very few businesses that have the competitive position that Moody’s and Standard & Poor’s have.” Recall that Buffett has actually said that pricing power is more important than good management. That has certainly been the case at Moody’s.
Barney Frank has forceful words for the ratings agencies:
“They are extorting the cities of this country,” Frank said in a telephone interview. “By the criteria they use for the private sector, every full faith and credit municipal bond should be AAA.”
Bonds from cities and countries are rated “more harshly” than those of banks and corporations, according to the academic study, which was released in August by Jess Cornaggia of Indiana University, Kimberly J. Cornaggia of American University, and John E. Hund from Rice. There’s “virtually no chance” of default on bonds backed by the ability to tax, Frank said.
And fortunately, there have been some efforts to encourage more competition in this space.
So let me get this straight: Buffett wants us to raise taxes … so that governments across the country can afford to pay jacked-up fees for credit ratings? That’s obviously not how Buffett sees it. But he hasn’t exactly been fair to those who believe that the double taxation of capital income might merit consideration when we design the federal tax code.