The Dagong Show

*The Dagong Show*
**By Phil Hall**

new-PhilH***There is a good chance that you are unfamiliar with the Dagong Global Credit Rating Co. This Chinese credit rating agency is mostly unknown in the U.S., but it is already making significant inroads in other parts of the world, and there is no reason to believe that it will not have a major presence in the U.S. sometime in the near future. Personally, I am glad to see Dagong’s emergence because it offers the only serious challenge to three of the most conspicuous simians among the 800-pound gorillas that no one in the financial services orbit wants to acknowledge: the problematic U.S. ratings agencies.

****For the past five years, the role played by Standard and Poor’s (S&P), Moody’s Corp. and Fitch Ratings in the run-up to the 2008 economic crash has barely been acknowledged by the federal government and the mainstream media. Oh, yeah, Eric Holder’s Justice Department filed a suit against S&P earlier this year, but that is mostly seen as crass payback for the agency’s decision to downgrade the U.S. government’s credit rating in 2012 following the debt ceiling debacle – S&P’s pre-2008 actions were virtually identical to ratings offered by Fitch and Moody’s, but the latter two maintained Washington’s AAA rating in 2012 and were strangely spared the wrath of Holder. The credibility of the Holder campaign against S&P was further obliterated by his department’s decision to leak the news of the lawsuit to the Wall Street Journal before any legal documents were filed in court.

****For the most part, the three agencies have looked back at their disastrous ratings of toxic mortgage-backed securities, shrugged their shoulders, uttered an insincere “Oops!” and kept on trucking. Today, the relationship between this threesome and the U.S. financial services industry is a stale case of business-as-usual.

****Maybe it is time for the status quo to be shaken up. When the Chinese government began trumpeting Dagong as an alternative to the American credit rating trio in 2010, it called for more honesty and transparency in the credit rating process. No less a figure than Chinese President Hu Jintao announced the need for an “objective, fair and reasonable standard” that would “not be affected by ideology.”

****Of course, having Hu Jintao call for ideology-free fairness is equal to having Miley Cyrus advocate the importance of modest ladylike behavior – but even if the messenger was the wrong person, the message was still long overdue.

****In July 2010, Dagong first gave Washington an AA rating, which it downgraded to A+ with a negative watch four months later. That was eventually dropped to an A- and last month Dagong downgraded Washington’s credit rating further to an A, noting that the federal government was “still approaching the verge of default crisis, a situation that cannot be substantially alleviated in the foreseeable future.” The U.S. credit agencies, in comparison, viewed the recent shutdown and debt ceiling crisis and left their ultra-high ratings of Washington unchanged.

****Needless to say, Dagong is not among the most favored entities in Obama’s Washington. The U.S. Securities and Exchange Commission will not provide it with Nationally Recognized Statistical Rating Organization designation, claiming that Dagong does not “comply with the recordkeeping, production, and examination requirements of the federal securities laws.”

****However, the view from across the Atlantic is somewhat different. In June, Dagong became the first Asian credit rating to receive approval from the European Securities and Markets Authorities, which gave the agency approval to provide services in the 27 European Union nations. Hmmm, what does Brussels know that Washington doesn’t?

****Dagong has also teamed up with Russia’s RusRating and an American entity called Egan-Jones to create the Universal Credit Rating Group (UCRG). How the UCRG will operate remains to be seen, but its arrival provides some much needed oxygen to the game.

****While Dagong is obviously not in a current position to overthrow the supremacy of S&P, Fitch and Moody’s, it has already chiseled out the first crack in their credit ratings supremacy. Ultimately, time will be Dagong’s ally – and in the none-too-distant future, the big three will have to scoot over and make room for a fourth player from across the Pacific. And if Dagong’s recent analysis of the Washington credit worthiness is any indication, it will offer some much needed honesty and frankness – which, on its own terms, is not something that often blows out of Beijing.