A Poor Standard? Rating the Credit Agencies' Credibility

This is a rush transcript from "On the Record," August 8, 2011. This copy may not be in its final form and may be updated.

GRETA VAN SUSTEREN, FOX NEWS HOST: Well, this is rough. From AAA status to AA-plus, Standard & Poor's downgrades our credit rating for the first time in history. The agency cites the political gridlock in Washington over the debt ceiling a main reason for its decision. But S&P has definitely made very bad calls before. And right now, as Wall Street looks almost toxic, the criticism against our credit agencies is mounting.

Joining us is New York Times business reporter Louise Story. Louise, you know, this is almost -- too bad it's so serious. It's like a dark comedy. The very ones who were such dopes on those -- on those bumbling (ph) of the mortgage credit swaps in 2007 that it sent us spiraling into this, now people are actually paying attention to what they say. They got it wrong before, and now S&P for some reason is brilliant and they accurately gauge our credit rating. I don't get it.


VAN SUSTEREN: (INAUDIBLE) people listen to them.

STORY: Well, it's pretty amazing because, you know, during the financial crisis and right after, a lot lawmakers said they were going to overhaul the rating agencies, change the whole system. And there were some changes in the financial reform bill, but only a few. And so the rating agencies are left incredibly powerful. There's three main ones, Standard & Poor's, Moody's and Fitch. And they have what a lot of people view as kind of an oligopoly because, you know, there isn't much competition and the markets look to them for this information. And it does have a big effect.

VAN SUSTEREN: All right, well, this makes me even crazier because you talk about how a lot of things were done after 2007. I got from your story in The New York Times yesterday that with the financial reform bill -- I'm quoting from you -- written last summer, regulators were supposed to write rules designed to reduce the heavy reliance on credit ratings by banks and other buyers of debt securities, and those rules have not been written a year later.


VAN SUSTEREN: ... nothing, zero.

STORY: And you know what's so amazing about this, Greta, is that it's really the government that puts the rating agencies into the position of being so powerful. Since the 1930s, over the various decades, regulators put into all these rules about mutual funds and banks and pension funds that they should rely on ratings, that if something got a AAA, it was OK to have in a portfolio. And that's what gave these companies so much power in the marketplace. Dodd-Frank says you're (ph) supposed to undo some of that. There's been a little progress made, but there has not been a lot of progress made on the rules that the bank regulators are supposed to write on this.

VAN SUSTEREN: All right, two quick questions. Is anyone getting rich off these credit agencies? Anyone at the top making a lot of money, anything like that? That's the first thing. Are the second thing is, is that -- are there conflicts of interest written -- almost built into the institution of credit ratings as they look at securities?

STORY: Well, you know, the rating agencies do make money typically off of deals they rate. The interesting thing here is, usually, you know, if they rate a company, if they rate Procter & Gamble, Procter & Gamble would pay them for the rating. This is a unique situation. The U.S. government does not pay them for the rating. And in fact, you know, you would think if the U.S. had an option about this rating, given what's going on with S&P, they'd say, Don't rate us. So they're not making money specifically off of...

VAN SUSTEREN: Except it's marketing. Except it's marketing!


VAN SUSTEREN: Who doesn't want to be a big deal rating the United States government, whether you're giving the AAA, AA-plus? I mean, it puts them in play. It puts them in the game so others think they must know what they're doing, but for the fact if you did any research, you'd find out that it's like -- you know, like looking at a casino in 2007 and guessing evens when it should have been odds.

STORY: But I'll tell you what's amazing to me. I started looking into, who are these people behind the rating? And what is their process? And I called Standard & Poor's today, actually, and I said, How many people were on the committee that made this decision? They said, We can't tell you. And I e-mailed back and forth and I said, Well, who are the people? Well, we can't tell you. Well, was the vote unanimous? We won't tell you.

And so there's three people on the committee whose names have come out, and so, you know, we're looking at who they are. One's a former Salomon trader. He worked at Banker's Trust. Another used to work for the Canadian finance ministry. But we don't get to know who the rest of the people are. And this is a very public thing they've done that obviously is affecting the market, but they operate in secrecy.

VAN SUSTEREN: And let me remind you, we go back to where we started, that Congress could have done something, but Congress ignores it. Congress has been on notice. Congress has done nothing. To the extent that they've done something and said rules had to be made, they simply have never followed through and not made the rules.

STORY: That's right. But you know, this may give them some new ammunition. I would watch for possible coming legislation.

VAN SUSTEREN: Yes, don't hold your breath. We thought that with the credit swaps when they -- when they sunk our ship, or economic ship five years ago, or four years ago. So I don't know if we'll -- why you should hold your breath now for that one. Anyway, Louise, thank you. It's a great article. Thank you.

STORY: Thank you.