Over the past approximate quarter century of so-called economic globalization, Wall Street’s ability to be the home of the only dominant “global” rating agencies to bestow ratings on the credit-worthiness of the world has been one of the most effective weapons of financial warfare in the Wall Street arsenal. They rate nations as well as private corporations. Now an answer to the Moody’s-Standard & Poors-Fitch US rating monopoly is coming. Not from the EU, where it is long overdue. It is coming from Russia and China, as so many bold and challenging initiatives of late.
Today, despite repeated financial crises where the New York Big Three credit rating agencies either failed or acted with clear political bias to rate, a virtual global monopoly is held by Moody’s, Standard & Poor’s and Fitch Ratings. The ‘Big Three’ as they are called, issued 98% of all credit ratings in the United States and roughly 95% worldwide. That’s influence, brother.
The system that the most important banks of Wall Street developed after 1944 to make New York the world financial center and the dollar its reserve currency had several well-conceived facets to it. After 1945 it was the fact that the US Federal Reserve held some 70% of the world’s monetary gold so that the dollar was then “as good as gold.” The nations of defeated Europe scrambled to get every possible dollar to buy American machinery and goods for postwar reconstruction. The Marshall Plan was explicitly drafted to use US taxpayer dollars to extend loans to the recovering European economies, almost $12 billion in the period 1948-1951 that was used to buy essential goods like US wheat and Rockefeller American oil and to buy US machine tools, back when America was world leader in machine tools, to reconstruct factories and housing.
The Dollar System that I describe in detail in my book, Gods of Money: Wall Street and the Death of the American Century (Der Untergang des Dollar-Imperiums), has been at the center of the power of the Wall Street Money Trust (as it once was correctly named) and the American oligarchs ever since they created the Bretton Woods Treaty in 1944.
Now that same dollar system is facing an existential crisis and the power of those same oligarchs to increase their power through wars everywhere—wars financed by the savings of other nations such as Germany, or Japan or China or Russia—is threatened as never before. To survive they are unleashing global financial sanctions wars against countries like Syria, Iran, Russia; currency wars and now a de facto “rating war.”
After the defeat of Germany and the Axis powers in 1945, the families who controlled the banks of Wall Street and of Lower Manhattan—Chase Bank, Citibank, or Morgan Stanley, Lehman Brothers, Merrill Lynch–built a de facto empire in which, according to the rules they imposed on a defeated world, including a bankrupt Britain, would be based on the supremacy of the US dollar in the world.
In 1945 it was easy to get a defeated Europe to agree to Bretton Woods Gold Exchange Standard in which all currencies would be fixed to the US dollar and the dollar alone fixed to gold at $35 an ounce, where it remained until the system collapsed in August 1971 and Nixon abandoned gold-dollar convertibility. By then Europe was booming with modern reconstructed industry and the USA was becoming a rustbelt. France and Germany demanded US gold bullion instead of inflated dollars, and US gold reserves were vanishing.
After 1971, the dollar flooded the world unfettered by gold reserve requirements and US military might during the Cold War forced Japan, Western Europe and others including OPEC to accept constantly inflating paper US dollars.
From 1970 until about 2000 the volume of dollars in the world had risen some 2,900%. Because the dollar was the world “reserve currency” needed by all for trade in oil, goods, grains, the world was forced to swallow a de facto mammoth inflation after 1971.
A corrupt rating monopoly
The established New York credit agencies would play a strategic role in this post-1971 dollar system. During the 1970’s the US Government’s Securities & Exchange Commission, charged with oversight of bond and stock markets, issued a ruling giving the then-dominant New York credit rating agencies—Moody’s and Standard & Poor’s (and later Fitch Ratings)—a de facto guaranteed monopoly in an unregulated market, when they ruled that only “Nationally Recognized Statistical Rating Organizations” would be qualified to issue appropriate ratings, i.e. only Moody’s and S&P. Corruption was made endemic to the US ratings game and Washington was party to the dirty deal.
By the end of the 1970’s, using the vast amount of OPEC “petro-dollars” from the two oil price shocks in 1973 and 1979, New York international banks, using London, began to loan to the rest of the world to finance imports of oil and other essentials. The New York credit rating agencies, previously primarily rating US corporate bonds, expanded into the new foreign debt markets as the largest and only established rating agencies in the new phase of dollarization and globalization of capital markets. They set up branches in Germany, France, Japan, Mexico, Argentina and other emerging markets much like the US Big Five accounting firms.
During the 1980s the rating agencies played a key role in down-rating the debt of the Latin American debtor countries such as Mexico and Argentina. Their ratings determined if the debtor countries could borrow or not. Financial market insiders in London and New York openly spoke of the “political” rating agencies using their de facto monopoly to advance the agenda of Wall Street and the Dollar System behind it.
Then in the 1990’s, the New York rating agencies played a decisive role in spreading the “Asia Crisis” of 1997-98. With the precise timing of its downgrades they could worsen the panic because they had been suspiciously silent right up until the first sign of crisis. The result was that the then-Asian “Tiger” economies of Thailand, South Korea and Indonesia for the first time were forced to submit to destructive IMF conditionalities, whose ultimate result was a massive export of capital from Asia into the US dollar bonds that created the “Clinton” prosperity. Before the 1997-98 Asia Crisis, dollars were flooding into the Tiger economies to invest. After it, some $200 billion a year according to a Bank for International Settlements estimate, flowed in the reverse direction into US Treasury bonds, pushing US interest rates way down and feeding the dot.com stock bubble.
Curiously, when it came to its own backyard, such as with rating the Texas energy giant Enron in 2001, the largest postwar US corporate bankruptcy, the rating agencies were strangely blind. They gave Enron best ratings right up to the last minute. Moody’s and friends did the same with their ratings of “sub-prime” US real estate bonds—so-called Mortgage-backed securities in the first seven years of the new century. They gave out the highest AAA ratings right up to the outbreak of the panic in March 2007. They did so even though signs of crisis were everywhere in what was a brazen conflict of interest, as the Wall Street mortgage bond issuers themselves, under the bizarre rules of the US rating game, paid the raters to rate them. The rating agencies were earning a new windfall in profits by rating the new asset-backed securities and had no interest in “taking away the punchbowl just when the party was really getting hot.” Nor did Alan Greenspan at the Fed for that matter.
Notably, until the present, the Big Three US rating agencies have been virtually unregulated. They need not fear legal action for their ratings, even if politically biased, since the US Supreme Court ruled that ratings were simply an expression of the agencies’ informed opinions, protected as “free speech” under the First Amendment. Only in 2006 was even a pretense of legislation, the deceptively-named Credit Rating Agencies Reform Act of 2006, passed by Congress and had no visible effect deterring the rating agencies. The reform was purely cosmetic to convince the electorate that the Wall Street-owned Congress was doing something to prevent a repeat of the crisis.
In the Greek sovereign debt crisis, just as EU governments were about to finalize a deal to stabilize the Greek government’s bond debt, in April 2010 Standard & Poor’s (S&P), suddenly downgraded Greek state debt by three full levels to “junk” rating, which forced most pension funds around the world to liquidate the bonds, sending Greek interest rates to more than 10%. That rating act created the Euro crisis. It also saved the falling US dollar, the heart of the Wall Street-US Treasury-Federal Reserve Dollar System.
EU rating failure
The blatant political timing of that April 2010 S&P Greek downgrade convinced many EU governments of the urgent need for a truly independent European Rating Agency. Notable is the inability of the EU to act on that and some seven years after the outbreak of the financial crisis of 2007-8. The EU has done nothing to defend its own sovereign interests by having an independent credit rating authority. In April, 2012 the attempt to devise a European credit rating entity that, unlike the US model would not be financed by the governments or companies receiving the ratings, died for lack of support and due to subtle pressure from Washington by informed accounts. Washington and Wall Street don’t easily give up such strategic monopolies.
The Raters threaten Russia
Now the US is trying to use the rating agencies to drive Putin’s Russia to the precipice of sovereign default.
On the eve of Christmas, December 23, 2014 when most of the world was decorating their Christmas tree or buying gifts, Standard & Poor’s, the same rater that triggered the April 2010 Greek crisis, announced there was “at least a 50 percent chance” that Russia will be lowered to junk within 90 days. S&P will issue its rating at end of January they say. On January 12, Fitch, the smallest of the Big Three US raters joined S&P with the same downgrade one notch above junk.Moody’s Investors Service ranked Russia one step higher than S&P and Fitch. In April, as Washington’s US Treasury financial warfare against Russia began, S&P lowered the Russian sovereign debt rating one level in April to BBB-. In short, the New York rating cartel holds a Sword of Damocles over Russia.
Junk rating would force most international pension funds and investment institutes to dump Russian state bonds just as in the Ruble default crisis of 1998, a crisis where US hedge fund billionaire, George Soros played a key nasty role and reportedly made a killing.
Notably, the same Soros today is shouting from the roof tops and in OpEd articles in the major financial media that EU and US and other governments must urgently come to the rescue of Ukraine and not allow a default that would hurt private Ukraine bondholders. Soros is also beating the drums for war against Putin’s Russia.
Market rumors are that Soros opportunistically bought a huge amount of cheap Ukrainian bonds, confident that the EU would come to the rescue. They haven’t. Now the old fox shows signs of panic. On January 13 he went to Kiev to meet Ukrainian billionaire President Petro Poroshenko. In Kiev Soros stated, “Ukraine is struggling to protect not only itself, but also Europe (sic!). Thus, Europe should help Ukraine implement reforms necessary for the country.”
EU Commission President Juncker triggered Soros’ panic on December 17 when he announced no new EU money to bail out Ukraine was forthcoming for at least the next two years. The EU had other fish to fry, he said. So much for the February 2014 EU rosy promises of billions in financial support to the neo-nazi coup regime they and Washington illegally installed in Kiev with their hollow offer of an EU Associate Member status.
Russia and China act
Unlike the politically impotent EU, however, Russia today is not the Russia of the corrupt Yeltsin era of the late 1990’s. Vladimir Putin and China’s Xi have agreed to create their own international credit rating agency and it plans to open for business this year, 2015.
The Universal Credit Rating Group (UCRG) plans to begin official independent ratigs in 2015 to challenge the Moody’s, S&P and Fitch ratings monopoly, according to RusRating Managing Director, Aleksandr Ovchinnikov.
The new agency will be based in Hong Kong. Interestingly, there is a third equal partner to Russia and China in UCRG. In addition to China’s Dagon Credit Rating Agency, Russia’s RusRating the US-based independent Egan-Jones Ratings is partner in the new UCRG. Each member will hold an equal share in the venture, with an initial investment of $9 million. In effect, three already well-established national independent rating agencies form the new UCRG joint venture. It is a serious challenge to the New York Big Three monopoly.
Egan-Jones Ratings Company, also known as EJR, founded in 1995 is a very interesting artner for Russia and China raters. It is unique among US nationally recognized statistical rating organizations (NRSROs) for being wholly investor-supported, not client-financed, eliminating the gross conflict of interest of the Big Three. On April 5, 2012, Egan-Jones was the first rater to downgrade the credit ranking of the United States. In addition Egan-Jones was also the first to downgrade WorldCom and Enron.
The UCRG was officially created in June 2013 and has since been finalizing its business structure. Ovchinnikov added that, “When the issue of creating an agency alternative to the ‘Big Three’ was raised, we in fact offered a project that was ready to be launched and was supported by the governments of Russia and China.” He explicitly pointed to the bias of the US Big Three raters to be overly “generous” to US and EU clients while being biased against developing or emerging countries such as the BRICS—Brazil, Russia, India, China, South Africa.
Now with an independent credit rating agency, a $100 billion BRICS Infrastructure Bank and strategic local currency agreements in place, Russia and China, Brics for Brics, are establishing the architecture to a genuine alternative to the destructive neo-colonial IMF and World Bank and the tyranny of the Wall Street dollar system. The year 2015 will indeed by interesting. Poor Mr. Soros might have to look for another job.
F. William Engdahl is strategic risk consultant and lecturer, he holds a degree in politics from Princeton University and is a best-selling author on oil and geopolitics, exclusively for the online magazine “New Eastern Outlook”