Universal Credit Rating And The Fall Of The Three Fat Pigs

They were three mean fat little pigs that spread financial terror on the planet of Pigstan. They destroyed families, destroyed careers, whole nations, who cities. People were afraid of them as they wielded the financial weapons of mass destruction. The weapons had mind numbing names like AAA, Baa1 and the most destructive of all was the mother of all financial bombs C or DDD. The names of the three fat little pigs were Moody’s, Fitch, and S&P. They worshiped two gods, the god of Greed and the god of Arrogance. Finally, the people of Pigstan rose up and said enough was enough. Down with the three fat little pigs. Down with Moody’s, down with Fitch, down with S&P, they shouted. This is the story of the beginning of the Credit Rating Revolution and the fall of the three fat little pigs.

The loss of credibility of the three fat little pigs Mood’s, Fitch and S&P began with the global financial crisis of 2008. It started with what is known as the sub-prime mortgage debacle. The Big Banks on Crooks Street (Also known as Wall Street) had begun in 2004 to encourage mortgage lenders to make loans to risky borrowers with high interest rates. The risky borrowers had poor credit scores indicating their shaky financial situation. Why would the banks do this? We will explain why.

They had the three fat little pigs, would make their financial shenanigans work. The three, Moody’s, Fitch and S&P were the biggest players in the credit rating industry. They were all private western owned companies. Companies, Banks, Institutional Investors, Mutual Funds, Private equity Funds, Municipalities and States would pay them to rate the bonds they issued or were interested in buying to determine if they investments carried little risk or not.

The Mortgage Lenders went to work with a zeal. They made risky loans to the risky borrowers. It was a mortgage loan bazaar. Everyone who came in could buy a mortgage with so many merchants screaming and offering tempting loans on houses of all price levels. These mortgages became known as the Sub-prime mortgages. Then in 2007, the Big Banks on Crooks Street then went into action. The first operation had started. They bought the loans from the mortgage lenders, with this they became technically the lien holders on the mortgages. They then repackaged these loans into exotic financial products like residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs). Now they were ready for the second operation.

The big three pigs Moody’s, Fitch and S&P now took over. It was already prearranged with the big banks. They gave stellar AAA (Triple A ratings) to the RMBS and the CDOs. The AAA ratings meant these financial products carried almost zero default risk. They knew very well that these were financial products built on very risky mortgages to very risky borrowers and that these mortgages were heading for default. We know that from internal memos and emails between analysts and investment bankers from the big banks. These are just a few of the exchanges;

December 2006: An S&P employee in an internal email;

[quote_box_center]Rating agencies continue to create an even bigger monster—the CDO market. Let’s hope we are all wealthy and retired by the time this house of cards falters.[/quote_box_center]

April 2007: Conversation between two S&P Analysts;

[quote_box_center]We rate every deal. It could be structured by cows and we would rate it.[/quote_box_center]

 July 2007: Conversation between an S&P analyst and an investment banker, the investment banker’s words;

[quote_box_center]I mean, come on, we pay you to rate our deals, and the better the rating the more money we make?!?! What’s up with that? How are you possibly supposed to be impartial????[/quote_box_center]

The now stellar credit rating branded RMBS and CDOs were now sold worldwide to investors and other financial institutions around the world. Let us imagine this scenario. You are the chief investment officer working for the finance ministry of a poor African country. Your country holds US dollar denominated foreign currency reserves. You decide to buy these “stellar rated” RMBS and CDOs hoping to earn a good return on investment to earn a bit more extra foreign currency cash for your poor country. You by your education and training in western economics believe naively that these investments are solid and will earn your country good money to fund development and infrastructure projects. So you go ahead and buy these financial products in your childlike trust of the western financial system.

In 2007-2008, the RMBS and CDOS became toxic. What everyone knew was happening. The risky low income borrowers began to default on the mortgages. That meant that the returns on investment on those mortgaged back securities stopped coming. The result was the financial Tsunami of 2008 known as the great recession. It was based on greed, arrogance and contempt for the Other. What would you do? Our hypothetical African Chief Investment Officer. Your country losing its hard earned money to the people you trust with childlike almost religious belief. I leave that to you to contemplate.

This was just the beginning of the loss of credibility of the pyramid of lies and fraud that the three fat little pigs had facilitated. The Chinese had warned the Americans then to bring sanity and impartiality into the world financial system. But the appeal was not heeded. The US establishment rather decided to ramp up the use of the big western credit rating agencies as a financial weapon.

In 2013, the Ukraine crisis started which resulted in escalating tensions between Russia and the West. The Ukraine has very little foreign currency reserves remaining in her central bank, no gold reserves as all her gold reserves were carted off to the US after the coup in February 2013. It can’t pay for gas to heat homes, is in the midst of a civil war. It has lost about 30% of its GDP up to date. She cannot pay her foreign creditors and her debt to gdp ratio is almost a 100%. But the big western three credit rating agencies gave her a solid credit rating score.

Meanwhile Russia which has more than 400 Billion Dollars in foreign currency reserves, 1260 tons of Gold Reserves in the vaults of the Central Bank, very little external debt and huge reserves of black gold oil and gas had her credit rating downgraded to junk status by the big western three credit rating agencies. This decision was so Orwellian that it has sparked a revolution in the credit rating world.

The Russians and Chinese went to work last year. This year 2015, they fired the first salvo. They announced the creation of the Universal Credit Rating Agency. This new ratings agency will be built this summer of 2015 on the basis of China’s Dagong rating agency, Russia’s RusRating rating agency and Egan Jones rating agency from the US. Egan Jones is considered interesting since it is not paid by corporations issuing bonds to rate their bonds. In the world of Crooks Street, that is evil.

Dagong, RusRating and Egan Jones will not be the only ones incorporating this new Universal Credit Rating Agency. There will be 50 credit rating agencies from countries all over the world who will be among the incorporators and have full rights in the new agency.

What should the African Union do based on this new development? The AU should establish a credit rating agency which will rate financial products and securities in Africa and join the new Universal Credit Rating Agency. That way Africa will escape the bias, contempt and downright disrespect of the three fat little pigs Moody’s Fitch and S&P which by their laughable ratings makes the cost of borrowing for African countries and institutions prohibitively expensive.

This new Universal Credit Rating Agency is an independent agency not connected with any state or company. No one wields veto power in it. By the end of the year, it will issue credit ratings for the BRICS countries, Latin American countries, the US and the European Union. Where is the African Union in this new development?

The era of the three fat little pigs Moody’s Fitch and S&P are over. Another nail in the coffin of western financial control over the global financial architecture. We are waiting for the swift decision of the African Union.