If I would ask you, what is the most powerful company in the world?
You might say BlackRock, which has over $10 trillion dollars under management, or JP Morgan,
the most powerful bank in the world, or Apple, that’s valued at over $3 trillion dollars
and shapes our reality today.
But what if I told you that there is another company that's more powerful than BlackRock,
JP Morgan, and Apple combined?
CEOs, presidents, billionaires, everyone is afraid of the power that this company holds.
This company has the ability to not just destroy JP Morgan but eliminate entire countries in
a glimpse of an eye.
And that company is Moody's.
You might have heard about it before, but not many know the extent of Moody's power.
As Thomas Friedman says, "You could almost say that we live again in a two-superpower
world.
There is the U.S. and there is Moody's.
The U.S. can destroy a country by leveling it with bombs; Moody's can destroy a country
by downgrading its bonds."
Moody's was literally the company that caused the 2008 financial crisis, sent Washington
Mutual which one of the largest US banks, to bankruptcy, and turned Sri Lanka into a
failed state without shooting a single bullet!
So why exactly is this company so powerful?
Before we get into that, give this video a thumbs up and I promise that you will be blown
away by how powerful this company is.
Back in the 19th century, the United States was going through a railroad revolution.
It was a big project that connected different parts of the country, like the east and the
west, factories and ports, and even small towns and cities.
This made it easier for people, goods, and information to move around.
But the government couldn't afford to pay for it all by itself, so they asked people
from other countries to invest their money in the project.
The problem was that these foreign investors didn't know much about the railroad business
or how it worked.
That's when a man named Henry Varnum Poor wrote a book called the "History of Railroads
and Canals in the United States."
He wanted to explain to these investors why it was a good idea to invest in US railroads.
This book eventually led to the creation of the first rating company, which is now known
as the S&P Global Ratings.
Later on, in 1909, a man named John Moody started another rating company called Moody's
Investors Services, and in 1913, John Fitch started Fitch Ratings.
Together, these rating agencies control the entire market.
Even though there are hundreds of rating companies, they have little to no influence.
But what exactly do these rating agencies do?
Rating agencies like Moody's are like teachers who give grades to companies and other organizations
based on how well they can pay back the money they owe.
They look at many things, like how much money the company makes, how it manages its debts,
and other important factors.
Just like how you get grades in school, companies also get grades, but instead of A, B, or C,
they get letters like AAA, AA, A, or B.
The higher the grade, the better the company is at paying back its debts, and the lower
the grade, the riskier it may be.
These grades help investors decide whether they want to lend money to a company or buy
its bonds.
If a company has a good grade, it means it's more likely to pay back the money, so people
feel more confident investing in it.
But if a company has a bad grade, it means there's a higher chance it might not be able
to pay back the money, so people might think twice before throwing their money into this
company.
But the power of these companies goes way beyond people imagine!
Back in the 2000s, Argentina was facing financial difficulties and had a lot of debt.
Basically, it owed a lot of money to a lot of people, just like when you owe your friend
money, so you stop accepting their calls because you know that they are going to ask for their
money back.
The Argentinean government took tough measures to fix the problem but it still had to borrow
money from the IMF.
However, these three rating agencies suddenly downgraded Argentina's credit rating, so Argentina
found itself in a situation where no one wants to lend it money.
In other words, when the rating agencies gave Argentina bad grades, it made other people
worried.
They didn't want to lend money to Argentina anymore because they were afraid they wouldn't
get it back.
It's like when your friends don't want to lend you toys because they think you won't
return their toys back.
Because Argentina couldn't borrow money anymore, it had to make big changes.
People had a hard time finding jobs, people couldn't even get the money they had saved
in the bank.
The country was in cheos, it had to go through harsh economic crisis.
But how do these ratings work in the first place?
Let's take a closer look.
This is Moody's credit ratings.
Just like your school grades, Moody's assigns ratings to borrowers.
The best grade is "AAA," which means you're very good at handling money and will probably
pay back your debts.
The worst grade is "D," which means you might have a hard time paying back what you owe.
Everything at the top here is considered a good investment.
Everything below means the chances of getting your money back are very low, that's why they
are known as junk loans.
When you want to borrow money, people who might lend you the money look at your Moody's
grade.
If you have a good grade, they will feel more confident lending you the money.
But if your grade is not so good, they might think twice because there's more risk that
you might not be able to pay them back.
But what is more important is, the lower your rating, the more expensive it becomes to borrow
money.
Microsoft has an AAA rating, but Intel has just an A+ rating.
Just because of these two different ratings, Intel will have to pay a much higher interest
to investors to be able to raise money.
It might be a tiny percentage, but it can cost the company billions of dollars.
So you want to do everything possible to satisfy these three companies and get the highest
possible ratings, for example, by buying consulting services from them.
We will talk about that later.
And it's not a one-time grade.
Moody's keeps checking on you and others to see if things change.
They want to make sure their grades are up-to-date.
If you do better with your money or your lemonade stand becomes more successful, your grade
might improve!
While it seems like they are doing a great job helping investors assess the risks of
their investment, that’s not always the case.
In 2011, the stock market crashed.
The Dow Jones Industrial Average dropped more than 600 points in a single day.
Investors began selling government bonds on a massive scale, causing the US government
to raise interest rates on its bonds to attract investors.
This made investors more cautious and uncertain about the future of the United States, leading
to fluctuations in stock prices, bond yields, and exchange rates.
All of this happened because a man named David Beers decided to downgrade the United States'
credit rating from AAA to AA+.
With a single decision, he caused the US, the largest economy and the most powerful
country in history, to lose hundreds of billions of dollars overnight.
The markets were in a panic.
Stocks experienced a significant decline, while the price of gold rose.
Jeff Bezos, Elon Musk, and Bill Gates all together don't have as much power as that.
The reason Silicon Valley Bank went bankrupt, even though they had $300 billion, is because
Moody's downgraded their credit rating to negative.
Just two days later, the bank collapsed and had to file for bankruptcy.
In took Moody’s less 48 hours to eliminate a bank with 300 billion dollars.
The fastest way to become rich is to borrow a billion dollars, invest it in the S&P 500,
and earn an 8 percent rate of return.
That would give you $80 million a year.
If the interest you have to pay on the billion-dollar loan is 5 percent, you would still keep $30
million after paying $50 million in interest.
However, if the loan interest is 20 percent, you would have to pay an additional $120 million
to service your loan, which would leave you poor forever.
So, who decides the interest rate on your loan?
Exactly!
These three companies.
If you have a good relationship with them, like Lehman Brothers did by purchasing their
consulting services, they will give you an A rating even if your business model has flaws.
Right before the housing crash, Moody's gave Lehman Brothers an A-2 rating, which means
there was very little risk of the company going bankrupt.
At the same time, Moody's made billions of dollars by selling consulting services to
Lehman Brothers.
But when it became clear that Moody's could no longer hide the fact that most of these
loans were junk loans, they downgraded Lehman Brothers' credit rating, which instantly led
to the company's bankruptcy.
In fact, 73% of the mortgage-backed securities rated triple-A by Moody's in 2006 were downgraded
to junk by 2010.
If it wasn't for the big three rating agencies, Silicon Valley Bank wouldn't have gone bankrupt,
investors wouldn't have blindly invested hundreds of billions of dollars in mortgage-backed
securities, and the 2008 housing crash wouldn't have happened.
It's not just about companies.
When a poor African or South American country wants to borrow money to build infrastructure
like roads, bridges, and airports to attract multinational corporations, whether it will
able to borrow money depends entire on the opinion of these 3 companies.
Whether they will borrow money at 2 or 20 percent also depends on them.
And somehow the more consulting services they buy from them, the better gets their ratings.
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thanks for watching and see you in the next one.