Terrorism flourishes brazenly at Ground Zero in the new 7 World Trade Center building. Here can be found a secretive entity of fabulous wealth and power. Kingdoms and corporations alike tremble at its shadow and make haste to pay it tribute. I refer to Moody’s Investor Services, wholly owned subsidiary of Moody’s Corporation, which reported $2.03 billion in revenues in 2006.
On January 10 Moody’s, in concert with the other main bond-rating firm, Standard and Poor’s, gave the United States its top AAA credit rating. The terrorist blackmail threat came in the form of a demand by Moody’s that the US government “reform” Social Security and Medicare: “In the very long term, the rating could come under pressure if reform of Medicare and Social Security is not carried out as these two programs are the largest threats to the long-term financial health of the United States and to the government’s AAA rating.”
Steven Hess, Moody’s top analyst for the US economy, spelled it out more explicitly to the London Financial Times: “If no policy changes are made, in 10 years from now we would have to look very seriously at whether the US is still a triple-A credit…. The US rating is the anchor of the world’s financial system. If you have a downgrade, you have a problem.” Thus does Moody’s man calmly threaten to plant the financial equivalent of a thermonuclear device under the Statue of Liberty.
Moody’s runs a protection game. It issues credit ratings (in 2007 covering no less than 39 percent of the global credit-rating market by revenue, according to Bloomberg) based on public data and private information made available by those clients that have “voluntarily” retained its services. The price of not volunteering can be high. As vividly reported in the Washington Post by Alec Klein in 2004, the giant German insurance corporation Hannover declined repeated Moody’s offers to rate its credit. Moody’s promptly issued an unsolicited and adverse rating, and then–just like a small-time mobster after hurling a brick through the window of a liquor store–went back to Hannover and reissued its invitation to offer protection-by-rating. Hannover’s top man said he wouldn’t surrender to blackmail, and so between 2001 and 2003 brick after brick went through the window as Moody’s steadily reduced Hannover’s rating all the way down to junk.
By contrast, Enron handled relations with Moody’s with ermine gloves. Until days before Enron plunged into bankruptcy Moody’s, like S&P, gallantly refused to lower the boom by demoting bonds issued by Enron to “below-investment grade.” Banks with huge sums at stake allegedly pressured Moody’s to keep quiet, even though Moody’s had privileged access to Enron’s internal financial operations.