Standard & Poor's: The Kings of Credit

Discover how a 19th-century railroad manual evolved into S&P Global, a financial titan that once downgraded the United States government.[INTRO]ALEX: On August 5, 2011, a private company did something truly unthinkable: they told the United States of America that its credit wasn't perfect anymore and stripped the country of its AAA rating.JORDAN: Wait, a private company can just... fire the treasury? That sounds like a financial coup d’état. ALEX: It wasn't a coup, but it was a earthquake for the global markets, and it came from S&P Global—a name that carries more weight in the halls of power than almost any bank on Wall Street.JORDAN: So today we’re looking at the people who literally grade the world’s homework and then charge them for the privilege?[CHAPTER 1 - Origin]ALEX: Exactly, but it actually started with a very different kind of power: the steam engine. In 1860, a man named Henry Varnum Poor published a massive book called the *History of the Railroads and Canals of the United States*.JORDAN: A 19th-century version of a Yelp review for trains? Why did anyone care?ALEX: Because back then, investing in railroads was like the Wild West—total chaos with zero transparency. Poor wanted to give investors actual data on whether these companies were solvent or just smoke and mirrors.JORDAN: So he was the original 'fact-checker' for the Gilded Age.ALEX: Precisely. Fast forward to 1906, and another guy named Luther Lee Blake founds the Standard Statistics Bureau to do the same thing for non-railroad companies. In 1941, these two data pioneers merged to form the name we know today: Standard & Poor’s.JORDAN: I love that they kept the name 'Poor' for a company that handles trillions of dollars.ALEX: It is a bit ironic! But by 1957, they launched the S&P 500, which shifted them from just providing data to defining what 'the market' even looks like.[CHAPTER 2 - Core Story]JORDAN: Okay, but how did they go from publishing books and lists to becoming so powerful they could downgrade the U.S. government?ALEX: It comes down to the 'Credit Rating.' Governments and companies need to borrow money by issuing bonds, and S&P gives those bonds a grade, like 'AAA' or 'BB+'.JORDAN: And I'm guessing a bad grade means you pay a lot more in interest?ALEX: Massive amounts more. But here’s the twist: S&P operates on an 'issuer-pays' model, meaning the companies they are grading are the ones paying the bill.JORDAN: Hold on. That sounds like a teacher getting paid by the students to grade their final exams. How is that not a massive conflict of interest?ALEX: That’s the multi-billion dollar question. In fact, it blew up in 2008 when S&P gave 'AAA' ratings to mountain loads of risky subprime mortgages that eventually collapsed and triggered the Great Recession.JORDAN: So they told everyone these investments were safe as houses when they were actually junk?ALEX: Pretty much. The U.S. Department of Justice eventually sued them, alleging they knowingly inflated ratings to win more business from investment banks. S&P ended up paying a 1.5 billion dollar settlement in 2015 to make those lawsuits go away.JORDAN: 1.5 billion? That’s more than a slap on the wrist, but did it actually change anything?ALEX: It forced some internal changes, but the market's reliance on their ratings didn't budge. They have essentially become a global utility—nearly every major investment fund is legally required to use their data or track their indices.JORDAN: They’re too big to ignore, even if they’ve been wrong before.ALEX: Exactly. And they’ve only gotten bigger. In 2022, they pulled off a 44 billion dollar merger with IHS Markit, which means they now track everything from ship movements to the price of coal to the future of electric vehicles.[CHAPTER 3 - Why It Matters]JORDAN: So they aren't just a rating agency anymore; they’re more like a global surveillance system for money.ALEX: That’s a great way to put it. Today, S&P Global is the majority owner of the Dow Jones Industrial Average and they calculate over a million different indices. If you have a 401k or an index fund, S&P is likely the one deciding what stocks are in it.JORDAN: It’s wild that one company has that much influence over where the world’s wealth flows.ALEX: And they’re leaning into the future with AI. They bought an AI firm called Kensho for 550 million dollars to automate their analysis, and they are now the primary arbiters of ESG scores—basically grading companies on their environmental and social impact.JORDAN: So they’ve gone from grading railroads to grading the survival of the planet.ALEX: They’ve positioned themselves so that no matter how the world changes, you still have to pay them to tell you what’s happening.[OUTRO]JORDAN: What’s the one thing to remember about S&P Global?ALEX: They are the world’s ultimate financial referee, and in the game of global capital, they own the whistle and the scoreboard.JORDAN: That’s Wikipodia — every story, on demand. Search your next topic at wikipodia.ai