The Downgrade of Chicago and the Rating Agencies: Criminal Enterprises

Yves Smith has a story up about Moody's downgrade of the City of Chicago.  Another story about how markets are manipulated for the benefit of the plutocracy.

My initial reaction was to be shocked when I read this.  I mean, even this is enough to make clear the rampant corruption in the system at this point:

I asked a colleague who had worked for Moody’s in the 1990s why outside parties were allowed to influence ratings. His reply via e-mail:

When I was at Moody’s, a substantial majority of the rating downgrades or upgrades that took place were initiated by an outside investor inquiry.

These days, it’s big business for investors to research a bond, conclude that it should be upgraded or downgraded, take the appropriate position in the bond, and then lobby the rating agency to make the move that is supported by their research, and profit from the change in market value (or market to model valuation) that accompanies the rating change.

Since rating agencies have historically invested virtually nothing in surveillance, it is not hard for a diligent investor to be ahead of the rating agency action. Once the rating agency gets the info on the bond, it is very hard for the rating agency to ignore the information.

As if this isn't bad enough - that people seek to manipulate the ratings of bonds so that they can take advantage of the ride up or down, speculation is that Rahm Emanuel himself lobbied to have the city downgraded.  Yves' friend believes that to be the case:

Also, I’m pretty sure I read in last couple of days that Rahm himself lobbied Moody’s to downgrade his state. I think that’s pretty fucked up, but I’m sure his hedge fund buddies taught him all about it. It’s about as evil as I would expect from Rahm as an elected politician.

It's pretty clear that Chicago's business class was pushing for the downgrade.  Yves links to this video of the head of the Civic Committee of the Commercial Club of Chicago, stating that he had personally contacted the ratings agencies about the ratings of state and city bonds, and essentially exhorting others to do so (the relevant portion begins at 46:30).  The idea that Rahm might have been behind is implied here as well.

Therese McGuire, a professor of management and strategy at Northwestern University's Kellogg School of Business, told Tribune business reporter Phil Rosenthal the Moody’s credit downgrade can be used as a political scalpel by Emanuel. "For Chicago, (Mayor Rahm) Emanuel is probably happy that Moody's downgraded the debt because he's going to be able to get concessions from the unions and whoever to make things happen." 

Really, can they recall politicians in Chicago?  This man has got to go.