Difference between Moody's, Standard & Poor's, Fitch?

DD, This is really interesting.

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Do you know the difference between Guernsey and Ireland? The ratings agencies didn't | Business | The Observer

Do you know the difference between Guernsey and Ireland? The ratings agencies didn't

Standard & Poor's, Moody's and Fitch were all unable to taste investment arsenic, yet they still hypnotise the financial markets

• 
• • Andrew Clark
  • The Observer,Sunday 24 April 2011
  • Article history

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For a crack team of analysts from ratings agency Standard & Poor's it must have been a plum assignment when they flew to St Peter Port last year to judge the credit-worthiness of Guernsey's government. At a cost to Guernsey's taxpayers of £50,000, they produced a fact-filled 11-page report with a top-notch verdict bestowing a coveted triple-A sovereign credit rating on the affluent Channel island.
This splendidly insightful piece of work was not very difficult for a simple reason – Guernsey has no debt. The government of the cash-rich island, where unemployment is 1.3% and the average house costs £346,000, does not owe any money and isn't planning to borrow any in the foreseeable future.
S&P's report solemnly lists Guernsey's debt ratio for each of the past five years, and forecasts it up to 2012 in the future: in each column, 0% of GDP. The analysts muse: "Fiscal flexibility is a crucial factor underpinning our opinion of Guernsey's creditworthiness."
It would be bizarre, to say the least, to give Guernsey anything other than an AAA rating – so obvious that Guernsey's similarly debt-free neighbour, Jersey, has decided S&P's services are a waste of money and has not bothered to splash out 50 grand to be rated. Welcome to the peculiar world of sovereign credit ratings.
Created through a 1941 merger of Standard Statistics with Poor's Publishing, New York-based S&P is the largest of the world's three primary rating agencies, ahead of Moody's and Fitch. It startled the world's financial markets last week by making a big call when it put the United States' triple-A rating on "outlook negative". That's not a downgrade. It's the step before "credit watch negative", which is the step before a downgrade – which, if it happened, would not be to anything as alphabetically drastic as a "B", merely going from AAA to AA.
S&P is worried about whether America's warring congressional politicians can reach a constructive deal on tackling a national debt of $14tn. The agency's throat-clearing was sufficient to send global stock markets down by more than 1% and trigger frenzied financial reassurances from United States treasury secretary Tim Geithner.
For all their limitations, flaws and inadequacies, the three big credit rating agencies still have a near hypnotic hold on the financial markets. That's despite their flakey track record: on the international front, Ireland commanded a triple-A rating from S&P until March 2009 and was rated double-A until November – the month the country appealed to the European Union for a bailout. Iceland, Portugal and Greece were marked down a little bit earlier. But on corporate bonds, the picture is worse – billions of dollars' worth of US mortgage-backed securities carried AAA ratings in the run-up to the financial crisis which exposed them as investment arsenic.
Politicians on both sides of the Atlantic have probed ratings agencies and urged reform. Critics say they have a fundamental conflict of interest: they are paid by the people they rate. One proposal mooted in Washington was for agencies to be randomly assigned to financial instruments, rather than selected by the companies issuing debt. But that, say the agencies, would mean an end to competition and leave little incentive to do the job well. Another idea is for investors to pay to see ratings. But that would mean wealthier market participants gain access to potentially crucial information more easily than the ordinary punter.
Business thinktanks including the New Economics Foundation and Re-Define want more competition in ratings. The European commission is consulting on a proposal to create an EU-sponsored, Europe-wide ratings agency. And Jules Kroll, founder of corporate detective agency Kroll Inc, is trying to smash the dominance of the big three by creating his own "sceptical" rating operation.
But little has changed to date. And these flawed credit ratings remain hard-wired into the core of the financial system. A new Basel III era of international banking regulations, intended to bolster capital adequacy, will force banks to comply with a 7% capital ratio. But that's capital as a proportion of "risk-weighted" assets, and assets with a triple-A credit rating officially carry a risk weighting of zero. That means that, even under these new enhanced rules, a bank could have had an infinite amount of Irish government debt on its books without any impact on its security rating.
The business of ratings is a lucrative game. Moody's last year reported earnings of $507m (£307m) on revenue of just over $2bn – a profit margin of 25%. Among its biggest investors is Warren Buffett, who knows a moneyspinner when he sees it. The Sage of Omaha has glibly defended ratings agencies, declaring that they "made the same mistake as 300 million other Americans" in failing to spot a housing bubble and a global financial crisis. That's good enough for him. But is it good enough for the rest of us?