Gillian Tett notes how just how sensitive — if not, paranoid — the ratings agencies have become these days, in the face of the current vast barrage of political and financial pressure. Nevermind the downgrading of mortgage-linked securities. Their real headache is now the companies that make a business insuring bonds.
The problem that dogs the ratings agencies is that if they downgrade the monolines, this could spark a much wider chain reaction. For the business model of the monolines does not work unless they have a AAA rating (or equivalent.) Or as a non-executive director of one monoline says: “The credit rating agencies are like our regulators — they have the power of life and death over us.”
So a downgrade of a monoline would mean a downgrade for all the bonds they have guaranteed. And it’s not just subprime – but swathes of the municipal bond market, which in turn could hurt mainstream investors and borrowers.
This is the stuff of Washington nightmares. But the US Treasury cannot afford to be seen to be pleading with the rating agencies to go softly on these monolines right now. After all, in recent months these very same agencies have been roundly criticised for having been too lax — by American politicians, among others.
Fitch, for its part, is trying to forge a way out of this tangled mess, says Tett. It indicated earlier this week that it will give the monolines a period of time in which they can raise fresh capital to avoid downgrades. She notes:
What this saga shows with painful clarity is the degree to which this decade’s wild credit party has been built on a complex set of interlocking financial flows and practices, that have often been dangerously circular in nature.
No wonder the agencies are jumpy. If one key part of the financial edifice is badly damaged, there is a real risk other parts will come tumbling down too.