Like many of us, I have been rattled by the volatility in the global markets sparked by S&P's downgrade of US T-Bills.
But when you think about it, the credit-ratings business isn't all that different from the TV-ratings business.
Twenty years ago, if you wanted to buy or sell a bond, it needed (according to Federal regulations) a rating from one of the ratings agencies, which at the time were Standard & Poor's and Moody's. (Fitch came along later.)
Also 20 years ago, if you wanted to buy or sell an advertising spot, it needed (according to standard operating procedure) to have a Nielsen rating.
But times have changed, in both the financial and the television-advertising industries. The chaotic response to the S&P downgrade this past week called into question (though not for the first time) a few critical issues with the way the credit-ratings agencies operate. Are they too powerful and secretive or no longer relevant? Should the market determine where the value is, rather than a legacy system of review? See if the following issues sound familiar to those of us in the TV business.
First, there's the unregulated oligopoly of Standard & Poor's, Moody's, and Fitch. With the passing of Dodd Frank last year, the ratings agencies faced the threat of drastically increased scrutiny in the aftermath of the 2008 credit crisis. (Recall that S&P reaffirmed the Lehman ratings only weeks before Lehman went bankrupt.). But as Jeffrey Manns pointed out in his excellent New York Times op-ed last week, the ratings agencies have the U.S. government "over a barrel." Manns wrote: "If politicians ignore rating agencies' warnings, they risk a withering assault of additional downgrades that could undercut confidence in the government and inflict soaring interest rates." At the same time, the ratings agencies wield an enormous degree of power that many think requires more regulation.
Then, of course, there's the lack of transparency, which persists year after year, despite occasional Congressional hearings that are meant to pull back the curtain on the "black art" of credit ratings. Lots of commentators have ventured guesses about the rationale behind last week's downgrade, but as anotherarticleintheTimes noted, the decision to downgrade was made by a "secretive committee" within S&P, about whose members the public knows relatively little.
Finally, others believe the ratings methodology is simply archaic. Consider the fact that two weeks ago, at the eleventh hour, S&P decided to withdraw its ratings on a $1.48 billion deal because it started using different models to review new bond issues. And the day before the downgrade, it was pointed out that S&P made a $2 trillion mistake (that's right, trillion with a "t") in its assessment of federal creditworthiness. Notwithstanding the error, S&P downgraded U.S. Treasurys -- and the result was like someone yelling fire in a theater, creating instant huge disruption in world markets.
So it appears that the credit-ratings businesses remain relevant -- perhaps too relevant for an unregulated oligopoly with no Congressional oversight. On the other hand, did you notice what happened when T-bills were downgraded? People bought T-bills. And the next day, the markets actually rose (then dropped, then rose again.) A week later, U.S. Treasurys are still in higher demand than the sovereign debt of other countries with higher credit ratings. So how relevant can S&P truly be?
Net-net, unlike 20 years ago, the value of a bond is no longer driven by the rating. It is the market itself, based on a readily available set of data and advanced analytical software developed by Wall Street banks that drives the value of a bond. In effect, the marketplace now drives pricing -- not the ratings decided upon in a secretive star chamber. Does this mean S&P should go away? Perhaps, as the Wall Street Journal intimated in an editorial this past Friday, saying that "having no federal standard for risk is the best standard of all." In any event, ratings will certainly become less important over the long term.
You can say the very same thing about traditional television ratings.
Five years from now, will traditional television ratings be irrelevant? (After all, Nielsen has lost its accreditation in 154 of 210 local markets, but advertising is still being sold in those markets.) Probably not, but multiple sources of data will rule the day. In the same way that television buyers and sellers have access to more granular data (thanks to set-top boxes) based on actual consumer behavior (such as purchase data), the value of a spot on television can now be valued by much more than Plain Old Ordinary Ratings. The shift -- toward useful, actionable, strategic data -- will set the stage for more accurate pricing, a more level playing field, more creative strategies, and ultimately a better return on investment.
Perhaps even Wall Street will take note.