Power to Rate Beats Trying to Influence
Moodys, Fitch and S&P Arent Typical in D.C.
More than 15 years ago, New York Times columnist Thomas Friedman wrote that “we live again in a two-superpower world. There is the U.S. and there is Moody’s.”
These days, it’s Standard & Poor’s, not Moody’s Investors Service, that has triggered worldwide reaction with its first-ever downgrade of the U.S. credit rating. But all three leading credit rating agencies — Moody’s, S&P and Fitch Ratings — still enjoy disproportionate political influence, especially in Washington, D.C.
“Their gatekeeper role gives them extraordinary leverage that is, frankly, unparalleled compared with any other private entity in the United States,” said Jeffrey Manns, an associate professor at George Washington University Law School.
The rating agencies’ heft on Capitol Hill derives less from some massive lobbying than from their innate power to weaken or bolster companies and governments. While recent reports have spotlighted rating agencies’ lobbying expenditures and campaign contributions, what’s remarkable is not how much they have spent to press their case in Washington, but how little. They operate no political action committees and have only recently begun to expand their K Street presence.
Together Fitch, Moody’s and S&P doled out about $6.8 million on lobbying in 2009 and 2010, according to the Center for Responsive Politics — a sizable sum but a tiny fraction of the tens of millions of dollars spent by banking interests in the wake of the Dodd-Frank financial reform law. The top 10 banks alone spent $87 million to lobby Congress on Dodd-Frank and other issues during that same time frame, according to an analysis by the Sunlight Foundation.
“Rating agencies don’t have to follow the conventional lobbying tactics to have influence in Washington,” Manns noted. “Simply going around and issuing the threat of a potential downgrade gives them an amazing weapon that no other actor has.”
Not that the top three rating agencies have eschewed lobbying altogether. The biggest player has been S&P, whose parent company, McGraw-Hill, spent about $3.7 million on lobbying since 2009. McGraw-Hill operates a PAC and focuses on a range of issues beyond financial services, including education and intellectual property. But in December the company brought one of its top public relations executives down to Washington to focus squarely on S&P.
“Going into this crisis, people really didn’t understand our role,” said David Wargin, the new director of external affairs for Standard & Poor’s in Washington. Wargin said his mission is to explain that role to the media, think tanks, policymakers, academics and other stakeholders. S&P also gets lobbying help from Nappi & Hoppe and the Podesta Group.
Moody’s has doubled its lobbying expenditures from just more than $710,000 in 2008 to $1.5 million last year. Fitch’s lobbying also has doubled since 2008, but still only totaled $440,000 in 2010. The three agencies have an ally in the American Securitization Forum, which opened a Washington office in March headed by Jim Johnson, former senior counsel to the Senate Banking Committee.
Officials for all three rating agencies said they maintain a strict firewall between lobbying activities and financial analysis at the firms.
“Fitch sometimes utilizes lobbyists, but such corporate matters are completely separate from and have zero influence upon our analytical groups that assign ratings,” company spokesman Daniel J. Noonan said in a comment echoed by officials at Moody’s and S&P.
At the same time, top executives and analysts at all three agencies have made tens of thousands of dollars in campaign contributions in recent years, with slightly more than half the money going to Democrats. S&P President Deven Sharma, for one, donated $9,000 to candidates between 2007 and 2009. The money went to half a dozen candidates, including Sen. Rob Portman (R-Ohio) and ex-Sen. Chris Dodd (D-Conn.).
“It’s not a whole lot of money, but obviously they are no strangers to fund raisers and the chance to mingle with politicians,” Sunlight Foundation Editorial Director Bill Allison said. He added: “Whenever I hear a company say that it has a solid Chinese wall, I’m always skeptical.”
Despite fielding a share of the blame for the fiscal crisis of 2008, ratings agencies have successfully helped slow or block a long list of new regulations under the year-old Dodd-Frank law. These include measures aimed at improving rating agencies’ transparency and accountability and ending potential conflicts of interest between analysts who are paid by the companies they rate.
“We’re in danger of seeing none of them really work to address the problems that were revealed in the financial crisis,” said Marcus Stanley, policy director of Americans for Financial Reform. “And the credit rating agencies are still one of the most profitable industries in the United States.”
On Capitol Hill, the S&P downgrade has set off a new wave of criticisms and scrutiny. The Senate Banking Committee is reportedly gathering information on S&P, and hearings could follow. Rep. John Tierney (D-Mass.) has called on House Oversight and Government Reform Chairman Darrell Issa (R-Calif.) to hold a hearing to examine the motivations behind the downgrade.
The panel should examine “what is the motivation, what is the credibility and what is the capacity of these organizations,” Tierney said. “And should they be put in the position of being able to have outsized influence in the political process, not just the financial process.”