Responsibility is a core co-operative value. We need credit rating agencies, like our banks, to be responsible, to encourage others to act responsibly, and to act in the interests of investors and ordinary people. That’s why we need a co-operative credit rating agency, writes Kieron Merrett.

What it must be like to be so powerful.

Imagine piping up one morning with your opinion of the United States’ public finances – and seeing it instantly reported, in hysterical tones, around the world. The BBC’s business editor trumpets, this “matters,” whilst few reports are critical of your analysis. Before long, a hashtag surfaces on Twitter, and problems are caused for US foreign relations. And financial markets are expected to react to your criticism – making it potentially self-fulfilling.

That, of course, is how international Standard & Poor’s, a credit rating agency (CRA), must have felt this weekend, when it ‘downgraded’ its opinion on the safety of US government debt. The firm demonstrated that, along with its ‘big three’ rivals Moody’s and Fitch, it still has astonishing influence over the world economy. Few government ministers, central bankers or journalists even come close.

We should be worried about this. When crisis erupted in the financial world, the three agencies were thoroughly disgraced. Ratings for complex financial securities, intended to be predictive, were downgraded after problems struck in July 2007. In the US ‘subprime’ mortgage sector, “over 90% of the AAA ratings given to subprime … securities originated in 2006 and 2007 were later downgraded by the credit rating agencies to junk status,” as US Senators reported. In many cases, the models and assumptions the agencies used to rate products were the same as those used by the banks themselves – what has been called the ‘garbage in, garbage out’ model. Even this weekend, Standard & Poor’s appears to have got its sums wrong by up $2 trillion.

Despite this record, financial markets and journalists continue to attach enormous importance to credit ratings. For a country which is already in difficulties, such as Spain or Italy, a downgrade has the potential to be catastrophic. We need those ratings to be produced responsibly, and in the interests of both investors and wider society. We also need investors and journalists to take their own responsibility for assessing government debt – using credit ratings as guides, not gospel.

There’s no reason why credit ratings shouldn’t be able to provide this. In the early 20th century, agencies compiled books of impartial, independent ratings of assets available on the market for investment. They were paid by the investors who bought the books, not the sellers of the assets being rated. That business model depended on developing a strong reputation for integrity and responsibility, and a relationship with investors.

Over time, as the financial sector has become more complex, the model has shifted. Credit rating agencies are no longer paid by investors; today, they are paid by the firms which produce the assets. That is a wholly different business model. Rather than relying on a reputation for responsibility, the firms instead became “triple-A factories” for their clients. Gillian Tett points out that, as the market for complex securities grew (accounting for half of Moody’s revenues by 2005), the ‘big three’ relied increasingly on close relationships – not with investors, but with a small circle of banks. Little wonder their ratings turned out to be so unreliable.

But investors can’t simply point the finger of blame at the agencies. In the run-up to the financial crisis, as assets became increasingly complex and opaque, many investors stopped taking responsibility for assessing their own investments. Instead, they simply relied on a ‘green light’ from a ratings agency. As Mervyn King said to MPs in 2008, “I think the problem has been that many investors, ranging from German public banks to other banks, have discovered that they did not know exactly what risks they had taken on.” He warned, “investors must take responsibility for what they buy.”

The Co-operative Party called last year for a new, co-operative credit rating agency, run by and for investors rather than debt issuers such as banks. This kind of agency would not suffer from the conflicts of interest which beset the current ‘big three.’ Rather than following the profit motive, which has led those agencies to foster increasing dependency on their ratings amongst investors, it would be able to promote co-operative values such as self-responsibility and self-help. And as a co-operative rather than a PLC, it could consider its wider and longer-term impacts on society when producing (for example) ratings on sovereign debt.

The global financial crisis was, first and foremost, a crisis of responsibility. This is core Co-operative territory. Making the financial system work sustainably, and in the interests of people, means using co-operative solutions and co-operative values. Standard & Poor’s this weekend have reminded us that credit ratings are just one more example of that.

Kieron Merrett was until recently an officer of Lambeth Co-operative Party and a researcher for Labour and Co-operative politicians in the UK Parliament.