Executive Summary
The 2015 film The Big Short has a vivid scene of an analyst working for a ratings agency, S&P, evaluating financial products that later turned out to be toxic. The questioner asks the analyst if they’ve ever given a rating not desired by the banks. The analyst can’t answer, and points out that if she gives a worse rating, they’ll just go to Moody’s.
The three main ratings agencies–Moody’s, S&P, and Fitch–exercise an enormous amount of influence over the global economy. Their ratings determine the creditworthiness of major corporations, banks, nearly all bond issuances, cities, states, even sovereign governments. Their authority is enhanced in countless federal and state regulations. Those regulations mandate that banks and insurance companies hold only highly-rated bonds. As a result, a poor rating from any of the ratings agencies can cost any issuer a great deal.
But it costs the public the most. This report delves into the state and local bodies that have borne the brunt of the ratings agencies’ two standards: one for the private sector where their profits are higher, and one for the public sector, where the profits are lower. While the private sector consistently gets great ratings–including for the types of securities behind the financial crisis–the public sector, in particular the State of New Jersey, Chicago Public Schools, Jackson, MS, and Newark, NJ–gets left with subpar ratings that massively increase borrowing costs.
This report exposes the ways in which the ratings agencies use their oligopoly against the public interest, and the tactics that unions, community organizations, cities, counties, and states can use to fight back.
Key Findings:
● Massive inconsistencies between ratings of municipal bonds and private sector bonds continue, six years after Dodd-Frank mandated an across-the-board standardization. In places targeted by ratings agencies, the costs ratchet up massively.
● The ratings agencies have launched an unprecedented attack on collectively bargained public pensions and retiree health care.
● Racial disparities within the municipal bond market are persistent, with nearly all of the cities and states at the bottom of the ratings scale being majority-minority.