Moody’s Credibility Deficit

By SETH SANDRONSKY

Main Street, beware. The Sacramento Bee’s political columnist, Dan Walters, resurrects a Wall Street swindler as a source after a ruling by Federal Bankruptcy Court Judge Christopher Klein against CalPERS, the city of Stockton and its pensioners. “Moody’s Investors Service underscored that effect by declaring that Klein’s ruling is “welcome news for investors” in municipal debt,” a decision that claims the US Constitution’s supremacy clause trumps the state’s retirement law for public employees.

However, if the word swindler retains any meaning, it describes Moody’s past practices. The gist of Moody’s fraudulent credibility is simple. It is one of the big credit rating firms like Standard and Poor’s that fraudulently assigned risk for mortgage-backed securities, or bonds.

Such fraud propelled real estate inflation. In simple terms, Moody’s credibility as a source on Stockton’s municipal bankruptcy involving one of Stockton’s creditors, Franklin Templeton Investments, one of the beleaguered city’s creditors, is a tragi-comedy.

Sourcing Moody’s favorably is a little like asking Ray Rice for a comment on spousal abuse. He, the former running back for the NFL’s Baltimore Ravens suspended from playing for punching his wife, Janay, unconscious in a hotel elevator, would simply not be a source on marital relations in a straightforward column or news story. However, we might expect a Rice interview on love and marriage in The Onion, that gem of a satiric publication.

However, when it comes to the pillars of the financial system such as Moody’s, history goes down the memory hole. Main Street loses, in Stockton and nationally.

Moody’s gave toxic investments of risky mortgages packaged into bonds the highest credit rating of AAA. This is a fact, not fiction, friends. We know what happened next. The market value of mortgages financing real estate, commercial and residential, then the bonds behind them, vanished like a fist when you open your palm in 2007-08.

If Stockton was the only city to suffer from such financial fraud, that would be bad enough for its public employee workforce. However, Moody’s bond ratings had a far wider impact, scores of more victims.

Recall when real estate prices sunk, global credit markets froze. What came next were massive private-sector job losses (hundreds of thousands a month across the U.S. in 2009), home foreclosures, business bankruptcies, and state and local government spending cuts. The sales and property tax revenues of states and cities like Stockton plunged.

Moody’s is a case study of financial and legal corruption. Its rating practices broke the law, but garnered the private firm and its bank customers booming profits. That is a fact.

Moody’s had top billing in the horrible events that ignited the Great Recession. This is the same credit rating agency that informed its high-paying customers in the big banks that their risky subprime mortgage loans, bundled into opaque bonds, were solid, reliable investments.

When last decade’s housing bubble burst, California cities such as Stockton got a nightmare of budget contraction. This fiscal force is in part driving this city’s filing for bankruptcy.

In contrast, Moody’s received a get-out-of-prison pass for its top executives who oversaw the firm’s financial fraud. What does all this mean unpunished criminality mean?

Moody’s has one thing: chutzpah, after its failure to comply with legal accountability standards. Why is this so? Our elected officials respond to dollars from financial firms. Moody’s annual congressional lobbying expenses doubled from $700,000 in 2008 to $1.4 million in 2010, according to the Center on Responsive Politics.

This donor-recipient dynamic results in Moody’s and other credit rating agencies walking through the fires they helped to light. Money doesn’t speak, it screams. What we have here is a structural peek at our era of non-punishable criminality for Wall St. elites. High finance oozes influence peddling.

Before the historic real estate bubble burst, Moody’s was up to its ears in breaking the law to benefit the bottom line, the company’s and its clients, the banks that sold scores of Americans risky home loans, and bundled them as bonds for investors. We err in relying on Moody’s as a credible source of budgetary issues involving the legal resolution of Stockton’s municipal bankruptcy. This principle of accountability for the perpetrators of financial fraud should apply to local governments and their employees in the future.

There are outlaw actors tied to the red ink drowning Stockton and other municipal governments such as Detroit across the US. One actor is Moody’s, whose credibility remains suspect, yet hidden in plain sight for some in corporate journalism.

Seth Sandronsky is a Sacramento journalist and member of the freelancers unit of the Pacific Media Workers Guild. Email sethsandronsky@gmail.com

From The Progressive Populist, November 15, 2014