Who rates the raters ?

By Dominic Rushe guardian.co.uk

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How do you rate the ratings agencies?

Their AAA ratings of dodgy securities helped create the financial crisis. Now, they're deciding the fate of nations. What a racket

Leading credit rating agency Standard & Poor's headquarters in New York. Photograph: Kurt Brady/Alamy
Remember when your mum told you to stand up to bullies. Not always a good idea, it seems. With economies across Europe now facing meltdown, the credit rating agencies that did so much to help them get into this mess have, according to Reuters, warned the European Commission they may stop rating risky countries. Why? Because the EU has had the temerity to suggest they should be legally liable if their ratings prove to be wrong. This threat, which would leave weaker European countries struggling to raise cash, comes amid an escalating battle between European officials and the ratings agencies. But it could also mark a turning point for the credit agencies – still under fire for their role in the credit crisis, a moment when these behemoths may finally be called to account. Relations between the three main credit agencies and the EU hit a new low this week after Standard & Poor's downgraded Portugal and demoted Greece's credit status to below that of Egypt. Not so long ago, credit rating was a staid and not terrible interesting business – few cared what they thought of Greek bonds or Portuguese debt. It wasn't until the 1990s that the agencies started to rule the world. Riding on the back of globalisation and technology, the two grand forces of our age, credit agencies managed to establish themselves as the dominant independent arbiters of risk. Today, the market is dominated by Moody's and Standard & Poor's, with Fitch running third. The big three rate everything from corporate debt to pension funds to countries – and everybody listens. It's also big business: if you want a good loan, you need a good rating. Last year, Moody's sales topped $2bn. But as their business and influence have grown ever larger, more people are starting to ask who rates the raters? As the Greeks and Portuguese will testify, their influence is enormous. Far larger economies than theirs have been battered by the ratings agencies. In 2000, Moody's took on Japan, downgrading its credit and causing an international incident as the cost of borrowing in Japan shot up. Moody's concluded that the pace of economic reform was not going quickly enough in Japan. As it considered another downgrade in 2002, the Financial Times pointed out that Japan would soon be rated lower than Botswana, a country where "a third of the population is infected with HIV/Aids". Japan is still on watch, with more downgrades threatened. But where would you rather put your money, really? Time and again, the agencies have got it horribly wrong. They promoted Enron even as its management blew the company up; they promoted the subprime mortgage market as its foundations collapsed – and took the financial markets down with it. In the US, states and investors are lining up to sue over their role in the financial collapse, arguing these fools couldn't pass a pig without putting lipstick on it. This poses a big question: do they know what they are doing, or they are more interested in profits than making accurate forecasts? Former members of staff seem to think it's the latter. In testimony to the US Financial Crisis Inquiry Commission, former Moody's analyst Mark Froeba said the firm's management "used intimidation to create a docile population of analysts afraid to upset investment bankers and ready to cooperate to the maximum extent possible." Froeba left Moody's after 10 years' employment, in 2007. All this is not to say that there aren't real structural problems in Greece, Portugal, Japan, Ireland or the UK, for that matter. Moody's has even said it might downgrade the US, if it doesn't get its fiscal house in order. But where were the agencies in the runup to this fiasco? Nowhere to be seen. Are they selling accurate information or "a feeling of confidence in the future", as Warwick University credit agency expert Timothy J Sinclair has it. When they were minor players, it wasn't a big issue, but now unelected executives with, at best, a spotty track record are shaping the future of nations, sailing through storms which they helped to create on the way to ever greater profits. Those who have the temerity to stand up to them better watch out. But if you were going to rate the raters, they would have to get an F.

Businesses fall prey to cyberthieves' cunning

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Among the growing ranks of consumers, business owners and others being lured by the convenience of online banking are legions of cybercrooks who have found the technology a convenient way to steal from unsuspecting victims.


More than 72 million households now manage their money online - up from about 12 million a decade ago, according to the financial services firm Fiserv. It's unclear how many of them have been targeted by crooks, but the FBI and a consortium of other government agencies reported in October that "thousands of businesses, small and large, have reportedly fallen victims to this type of fraud" with municipalities and nonprofit organizations increasingly coming under attack. And unlike individuals, they lack legal protections for their losses.

Ann Talbot learned of the danger four years ago when nearly $21,000 was taken from the bank account of her general contracting firm, Golden State Bridge. Then in May last year, cybercrooks struck her Martinez, Calif., company again, making off with about $100,000 from another account.

By then, Golden State had taken out an online-theft insurance policy, which limited its liability to about $10,000, according to Talbot, the company's chief financial officer. Even so, she is wary of the outlaws preying increasingly on those who bank via the Web.

"It's a huge problem," she said, adding that many people "have no idea of the threat out there."

It's just not lay people, either. FBI Director Robert Mueller told the Commonwealth Club of California in 2009 that he stopped online banking after getting an email that appeared to be from his bank, but that he realized was bogus after answering a couple of its questions.

After that, Mueller said, his wife told him, "no more Internet banking for you."

-In September last year, federal prosecutors in New York announced criminal charges against 37 people in a global online scheme that allegedly netted the crooks more than $3 million, including $130,000 from an unidentified hospital's California bank account.


-In October 2009, lawbreakers tried to abscond with $87,000 from a Danville, Calif., church, according to the Washington Post. Luckily, the transfers were blocked by the church's bank. Last August, the Catholic Diocese in Des Moines, Iowa lost several hundred thousand dollars in an online banking breach.

-In April last year, Aleksey Volynskiy was sentenced to 37 months in prison for plotting with hackers in the U.S. and Russia to loot individual Charles Schwab brokerage accounts.

Sarah Bulgatz, a spokeswoman for Charles Schwab, said the accounts were accessed through the victims' computers and not those of her company, adding that Schwab reimburses individuals for such losses. Under the federal Electronic Fund Transfers law, the liability of consumers who report an online bank loss within two days of discovering it is limited to $50 and only after 60 days are they liable for the entire amount.

But the law doesn't protect commercial, governmental or nonprofit enterprises. And the sizable sums those entities often maintain in their financial accounts make them attractive quarry for criminals. Of 504 small and medium-size businesses recently surveyed by Guardian Analytics, which helps banks and credit unions prevent theft, 32 percent said they had experienced an online-banking scam during the previous year.

While some banks have taken steps to prevent such larceny, many others have left themselves easy prey to hackers, who are becoming highly organized and using increasingly sophisticated tactics, said Guardian CEO Terry Austin. With more and more people banking online, he added, "the banking industry in general needs to step up to provide a higher level of security."

Some people - including Talbot of Golden State Bridge - also are urging lawmakers to give commercial ventures the same reimbursements afforded individuals. They have formed an online organization - Cyber Looting Awareness & Security Project - to lobby for the change.

That worries the American Bankers Association. It fears that if a company was shielded from liability the way a consumer is, "the business would be less inclined to take the protection measures necessary to protect their online accounts," which might prompt banks to stop offering online services, said the group's spokesman Doug Johnson.

He added that banks are working with law enforcement authorities to try to limit such crimes but that the problem is increasing because more people are banking online.

Still, many others are reluctant to send their financial information across the Internet. Of the more than 3,000 respondents to a survey by German security software firm Avira in November, 31 percent - nearly one out of three - said they avoid online banking entirely for fear of being ripped off.

Even a security expert can get hoodwinked, said Larry Ponemon of the Ponemon Institute, a data-protection research outfit in Michigan. After recently receiving an email that seemed to be from his bank, "I came really close to doing something silly" that might have compromised his finances, he said. "The bad guys are getting really smart."

One of the crooks' methods is to send a person a "spear phishing" email containing a malicious attachment. Once the person opens it, their computer is infected with malware that snaps up their bank-account login information, allowing the thief to masquerade as the person and steal their money.

Another common scam is to create websites that look just like those of real banks. When people mistakenly give the sites their financial information, criminals use it to make withdrawals.

The increasing numbers of people who bank via their cell phones face another threat, according to a report in November by viaForensics, a Chicago information security firm. It discovered that some phones stored the owner's financial data, making the information vulnerable if the phone is lost. Bogus banking applications for phones also have been designed to steal money from anyone using them.

Although banks are working to fix some of the phone vulnerabilities, "it's still pretty bad out there," said Andrew Hoag, viaForensics' chief investigative officer.

Unfortunately, by the time many people realize their savings have been hijacked, there's little they can do to get it back, said David Johnston, whose Modesto, Calif., electric sign business, Sign Designs, lost about $20,000 two years ago when thieves broke into its online account and transferred the money overseas.

"I was very angry," he said. "Your money should be safe in the bank."

(c) 2011, San Jose Mercury News (San Jose, Calif.).
Distributed by McClatchy-Tribune Information Services.
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US defense: $1 million soldier war budget!

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The $1 million soldier: What's wrong with how we budget war?U.S. soldiers stand guard before the opening ceremony for a newly completed mosque in a village in southern Kandahar province, Afghanistan. By Lawrence Korb and Laura Conle

Lawrence Korb, a former assistant secretary of defense in the Reagan administration, is a senior fellow at the Center for American Progress. Laura Conley is a research associate at the center.
The two-week-old military action in Libya has prompted a frenzy of headlines and sound bites about the operation's cost.

Can the United States afford it?

The short answer is "yes." The defense budget exceeds $500 billion a year, so the Pentagon has money on hand to pay for Libya.

But that's not the whole story. The recent events in Libya have opened up a long-standing and important debate about how we pay for our wars and military endeavors around the world.

The crux of the problem is that in recent years, Congress has paid for wars through emergency supplemental bills. At the same time, other defense costs were allowed to spin out of control.

And the costs have added up: The total bill for the wars in Iraq and Afghanistan has reached $1.5 trillion to date.

Estimates of the cost for boots on the ground in Iraq and Afghanistan vary, but some researchers place the average bill as high as $1 million per troop per year in Afghanistan and more than $600,000 in Iraq. Therefore, the cost of deploying 100,000 troops in Afghanistan this year will amount to over $100 billion.

These estimates depend on a wide range of factors, including transportation costs, the need to build facilities to handle an influx of personnel, and whether troops deployed are primarily active duty or activated reservists. (The latter lead to additional personnel costs, as they are not regularly paid a full-time salary.)

Can seized Libyan assets pay for the war?

Congress hasn't always funded wars through separate supplemental budgets. The costs for the conflicts in Vietnam and Korea for the most part were folded into the regular budgets that were submitted to Congress. And while the overall size of the budgets rose during those years, they did not rise to fully reflect the total cost of the war.

In order to keep the total federal budget in balance, the Pentagon eliminated some marginal programs not connected to the war.

Thus from 1964, the last year before the buildup, to 1969, the height of the buildup in Vietnam, the overall defense budget increased $27 billion to $79 billion. But when the actual war costs were subtracted, the 1969 defense budget declined in real terms by $15 billion, or 29%.

Similarly, in the Korean War, the Defense Department received a supplemental war budget only in 1951, the first year of the conflict. By 1953, the overall defense budget was actually lower than it was in 1951.

The Bush administration adopted a completely opposite approach to funding its wars.

Not only did it provide the Pentagon with more than $1 trillion in supplementals, it allowed the base budget to grow from $290 billion in fiscal year 2001 to over $500 billion by the time Bush left office.

Moreover, President Bush allowed the Pentagon to shift items like the F-22 fighter plane and V-22 aircraft, which belonged in the base budget, into the supplemental.

Military health costs up 300%

The majority of the costs for Libya, especially since the president has said he won't order ground forces, can be funded through the regular defense budget.

For example, some fuel, maintenance and personnel costs for operating U.S. B-2 bombers over Libya will be partially offset by the regular defense budget because those planes would be flown periodically, in any case, for training purposes.

Similarly, planes and ships used in the operation are normally deployed to the Mediterranean on a routine basis. In other words, we do not have to pay extra to have them there.

Finally, even after firing some 160 Tomahawk missiles, the U.S. still has over 3,000 in its inventory, more than enough to deal with any likely contingency.

Of course, it remains to be seen how much the Libyan operation will end up costing U.S. taxpayers.
But if Congress and the administration choose to go outside the regular defense budget to fund it, they should learn the lessons of the past decade and offset the full amount of the supplemental through cuts in the regular defense budget for fiscal year 2012. 

War in an age of deficits

Obama's defense costs not what they seem

Slaying the sacred cow

What the budget looks like in 2020

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