As I mentioned yesterday, the S&P has downgraded the debt of the US. This decision was taken under the authority of one David T. Beers, who is Managing Director of Sovereigns & International Public Finance at Standard and Poor`s. Beers was quoted extensively in the media yesterday.
Yesterday I wrote:
Who is David Beers, the individual mentioned above? Is he a US citizen, a Briton, or someone else? If he is American, did he vote for or against Obama on 2008? We do know that he lives in Londonand once attended the LSE, but aside from that the public knows little about him.
Bond rating agencies have great deal of mystique around them because we don’t know much about the handful of individuals who actually make up the ratings. Moreover, the bond rating agencies express their opinions in the form of quantitative scores, which seem very objective and scientific.
I’m not saying that David Beers is any more or less fallible than the next guy, but it is important to keep in mind that he is just one human being. Like all of us, he can be subjective. Can an American really be objective in rating the bonds of his own country?
I`ve done a bit more research. It turns out that Beers is North American, at least judging from his accent. Moreover, according to S&P`s press release, he wasn`t the primary analyst responsible for the downgrade. Apparently, the Primary Credit Analyst is one Nikola G Swann, CFA, FRM, who is based in their Toronto office. Her contact details are (1) 416-507-2582;nikola_swann AT standardandpoors.com. The secondary contacts were: John Chambers, CFA, New York (1) 212-438-7344;john_chambers AT standardandpoors.com, David T Beers, London (44) 20-7176-7101;david_beers AT standardandpoors.com I am posting their details here in case a journalist wants to get in touch with them.
We know even less about Nikola G Swann than we do about David T. Beers. This is a big problem. We know nearly everything about President Obama, Speaker Boehner, and the other major players in the political crisis of the last week. You can read Obama`s birth certificate online and can find out Boehner`s favourite brand of cigarettes. But we know next to nothing about the handful of individuals who rate bonds.
So who is Nikola Swann? Where did he go to university? Did he take any political science or economics classes? If so, what were the names of his professors? Is he a member of a political party? Does he have strong political views? Is he a Canadian or an American who lives in Toronto? If he is Canadian, is it possible that his views on the possibility of a US default are in some way connected to the anti-Americanism that is part of Canadian political culture and which has indeed been part of Canadian politics since, well, the end of the American Revolution? (Some Canadian nationalists would be gleeful at a US default, at least until their mortgage payments went up). Is Swann an American who moved to Canada because he hated Bush? Or is he a fan of Fox News and Ayn Rand? We should have some answers to these questions before we put much stock in his opinions.
There are two things that really annoy me about bond rating agencies. First, their predictions about which investments are safe have been spectacularly wrong in the past. They have a terrible track record, yet people continue to respect their predictions about the future. Parenthetically, I would like to recommend a great book about the charlatans who operate in the prediction business—it’s Dan Gardner’s Future Babble. He says that people who make a living from issuing predictions about the future are right only about half the time, which is no better than flipping a coin. Moreover, their business model is “heads, I win; tails, you forget I ever made a prediction.”
I am very conscious of the mistakes that historians make. We are fallible and often misinterpret events in the past. But at least we are speaking about things have already taken place.
Second, because they are presented as quantitative scores, ratings of sovereigns are often regarded totally objective and almost scientific. They are not. They are likely influenced by the political views and ideological preconceptions of the individuals doing the ratings. Quantification gives a certain false authority to these opinions. Moreover, these individuals that make up the ratings are subject to the same sorts of inducements are anybody else. I’m certain that S&P requires all of their analysts to put their assets into a sort of blind trust, to avoid the possibility of a conflict of interest. (Mr Swann may own US government bonds, but she wouldn’t know that if all of her assetts were in a blind trust). However, an analyst could easily be bribed by the nation-states they evaluate. I’m certainly not saying that this is the case here, but from the standpoint of a government faced with increased borrowing costs from a possible downgrading of the debt, it would certainly be worthwhile to bribe an individual credit analyst or even a company. Even though credit analysts are well paid, the bribe would not have to be large in the grand scheme of things.
Similarly, the credit analysts and their families could be subject to a campaign of harassment by state officials such as the police or the FBI. There is such a thing as shooting the messenger. Indeed, the Milan offices of two of the major credit rating agencies are currently being
harassed prosecuted by the notoriously corrupt government of Silvio Berlusconi, which is upset over their downgrade of Italy’s public debts.
Moreover, even the best intentioned, disinterested, and best informed credit analyst is, at the end of the day, a biological creature like all human beings.
Earlier this year, Shai Danziger of Israel’s Ben-Gurion University published a study of the decisions made by the parole board in Israel. Danziger was able to get data on 1,000 cases of prisoners who applied to the eight-man board. Thanks to some very accurate minutes, he was able to determine the precise time of day the deliberations on each case took place. He found an interesting pattern. Immediately after breakfast, the judges on the parole board were quite lenient and granted around two-thirds of the applications before them. In the late morning, the success rate of the parole applications fell, eventually reaching zero. Immediate after lunch, however, the success rate rose, only to fall again over the course of the afternoon.
All of this raises the question: what did Mr Swann have for breakfast on the day she decided to downgrade the US credit rating? Given that the neither of the other major rating agencies, Moodyès and Fitch, have followed the lead of S&P in downgrading the US debt, this may be the right question to ask.
P.S. Update: it appears that Nikola Swann is, in fact, a man. My apologies to all concerned.