The world’s top credit agencies are dumping claims that their research is “independent” in a shift that follows accusations of bias and allegations that their faulty ratings helped trigger the worst financial crisis in living memory.



According to an academic paper from Harvard Business School, McGraw Hill’s Standard & Poor’s and Moody’s, the two largest ratings agencies, have all but culled claims about the independence of their research from the documents they must file with the US’s top financial watchdog, the Securities and Exchange Commission (SEC).



Harvard professor Robert Eccles and researcher Tim Youmans assessed McGraw Hill’s 10-K filings with the SEC – annual, mandatory and comprehensive reports about a company’s performance – between 2004 and 2014. They found “a confusing picture”.

“For unexplained reasons, over the past 10 years McGraw Hill appears to be continuously diminishing, especially since 2012, the strength of its claims regarding the independent and unbiased objective nature of the credit ratings it gives to the debt issues of thousands of companies,” the authors found.



Trillions of dollars worth of debt are issued by companies, cities and countries looking to raise money each year. Between them S&P and Moody’s accounted for over 83% of the ratings issued, according to the study. All debt issuers who want institutional investors must be assigned a credit rating from one of the handful of recognised agencies, agencies which have come under fire in recent years for the quality and independence of their work.

In February S&P paid $1.5bn to resolve lawsuits over its rosy ratings for mortgage securities that turned toxic in the run-up to the 2008 financial crisis. In its complaint the Justice Department said S&P had delayed updates to its systems and weakened its criteria in a desire to gain more business from the investment banks that issued the securities.

S&P unsuccessfully sought to have the case thrown out arguing statements about independence and objectivity highlighted by the federal government as alleged fraudulent misrepresentations were corporate “puffery” and not meant to be taken at face value by investors. Judge David Carter called the argument “deeply and unavoidably troubling”.



Eccles said it was clear that the ratings agencies were now taking extra care in the use of the term “independent”. “We can not say who made those decisions or why but they are doing it,” he said. “But it’s a pretty huge change.”



In its 10-K filings for years 2004-2011, McGraw Hill “asserted multiple times in each filing that they provided independent credit ratings or words to that effect”, according to the paper. In 2012 McGraw Hill dropped the modifier “independent” before mentions of “credit ratings” and but continued to describe itself as providing “independent” ratings benchmarks. In 2013’s McGraw Hill described itself as an “independent provider” of credit ratings and benchmarks, “distancing the claim of independence from the nature of its ratings entirely and moving it to the nature of the firm”, the authors report. “Nowhere in the 2012 or 2013 form 10-K filings did McGraw Hill claim that they provided independent credit ratings or any words to that effect.”



Last year’s report continued the same absence of claims about the independence of its credit ratings, however, McGraw Hill did state it would “strive to be the leading provider of transparent and independent benchmarks and ratings”.



A review of Moody’s 10-K filings for 2004-2007 reveals that the company removed “any and all” statements claiming that its ratings are independent after 2008.



Eccles said while much of the criticism of the agencies had centred on the ratings they issue, the focus of this study was on the agencies disclosures about themselves. “Credit agencies are embedded in the financial system. The assumption is the ratings they make are independent. If the organisations themselves are backing off from that language, can you count on them or not?” he said.



The paper, Implied Materiality and Material Disclosure of Credit Ratings, is to be published in the Journal of Applied Corporate Finance. It is the first of three papers Eccles and Youmans will publish on the credit rating agencies. The second will look at credit ratings governance issues and the third at the business models of the institutions.

