Those over-rated ratings agencies have some explaining to do

IN THE midst of the 2008-09 global financial crisis, two very influential companies squirmed out of the spotlight that should rightfully have been trained right on them.

Moody's and Standard & Poor's, two private financial firms paid by sellers and buyers to rate other financial businesses, have for decades made billions of dollars out of the practice.

Yet the core group of companies that these agencies rated so highly were the very ones that triggered the biggest crash since the Great Depression of the 1930s. These were the Wall Street investment banks peddling so-called subprime housing loans and the complex derivative financial products surrounding them.

One of these ratings agencies, Standard & Poor's, despite its tarnished reputation, has downgraded the very government that struggled so hard to clean up the mess the ratings agencies created in the first place.

Over the weekend, S&P has announced it will downgrade the US government debt (Treasury bonds) below triple-A, arguing that it was dissatisfied that the President and Congress had agreed to cut only $2 trillion out of US government programs such as pensions and Medicaid, and not the $4 trillion that S&P (and the Tea Party "patriots") had been demanding.

One good may emerge from this piece of nonsense.

It might just, finally, blow the whistle on the methodologies and the political nature of the actions of these ratings agencies: in much the same way as Rupert Murdoch's News of the World scandal is likely to lift the veil on the methodologies and fear-mongering techniques that have led to Murdoch's overweening influence over politics in various countries around the world.

If investors are able to shrug off what seems little more than a public relations stunt by one of the agencies remembering that Moody's and other ratings agencies such as Fitch have retained their top ratings for US bonds a little bit of sanity might return to the debate about the state of the international economy.

There's little doubt that these are tough times. Both Europe and the US are wrestling with the reverberations of the global financial crisis as the various governments on either side of the Atlantic confront the reality that throughout 2008 and 2009 they were obliged to bail out the privately run financial miscreants with massive injections of taxpayer monies, just to prevent a complete meltdown of the global financial system. It has been a close-run thing, and the latest aftershocks are an indicator that we have further to go.

The two organisations that I preside over, the Australian Institute of Superannuation Trustees and the Australian Council of Superannuation Investors, represent about $450 billion of monies held in trust by non-profit superannuation funds in Australia. The superannuation system has already amassed a staggering $1.3 trillion pool of patient capital that acted over the past two or three years of the global financial crisis to stabilise Australia's economy, and it is projected to grow to $4 trillion by 2025.

While we are obviously concerned at any dilution of the values of the portfolios we manage on behalf of 10 million Australian workers and their families, we're also long-term investors who aren't easily spooked by a set of bad headlines or a silly stunt by a ratings agency.

Two decades ago, when I was editor of the national business newspaper, The Australian Financial Review, Australia went through the aftermath of the great 1987 sharemarket crash and the 1991-93 "recession we had to have" in its wake.

At the time, it seemed like the end of the world as we knew it, with headlines every bit as alarmist as the ones that have appeared over the past week or two. (With hindsight, I regret that I was perhaps responsible for a few of them myself.)

Yet if you look at long-term graphs now, it's sometimes quite hard to pick out the downward spike on the performance graphs, growing ever smaller as time washes away the importance of that shake-up to the global financial system.

This time horizon is difficult to keep in mind when the markets seem in perpetual turmoil, but it is worth musing that Australia's retirement savings system is both world class and designed to accumulate savings built up over more than 40 years of a person's working life, not the latest three or four months.

Gerard Noonan is president of the

Australian Institute of Superannuation Trustees and the Australian Council of Superannuation Investors and a former editor of The Australian Financial Review.