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Gary Wright

Gary Wright

Gary Wright - BISS Research

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Rating Agencies Stampeding Cattle

17 November 2011  |  3667 views  |  1

Since the first signs of the Credit Crunch and the debacle of bad asset valuation in the subprime disaster, the role of Credit Rating Agencies has created deep concern for Governments and Regulators alike. The independence that the finance industry always expected of ratings was almost unquestioned before, but not since.  This begs the question how do we rate the credit rating agencies?

The mistakes found during the credit crisis of 2007/8 are well documented but I am more interested in the position of Credit Rating Agencies today, which appear to be as strong as ever.

We only need to refer back a few days to the huge mistake of downgrading France and the disruption that caused the markets. Especially as confidence and trust in the markets are at such a low ebb and like sleeping cattle they are likely to stamped with minimal noise. Luckily the mistake was rectified quickly but it does illustrate how much power still resides with the Rating Agencies and their announcements.

Soon companies in the credit rating business will be regulated and not before time, but will this go far enough to prevent the trouble caused over the last 5 years?

Certainly transparency of the rating process and a public audit should allay fears concerning the actual independence that Rating Agencies purport to have. Remember they are not a charity and earn huge sums from those that are being rated and their products. The plan to move accounts regularly between rating firms would help to prevent long term relationships building to the detriment of the market. However, this will not be a solid wall to prevent abuse 100%.

The likelihood of new entrants into the ratings business looks unlikely unless a situation is artificially created to encourage firms into this market. There are potential prospects but they would need some assurance before committing.

The odds are, we have what we have and it will stay that way. The new regulations will of course be a costly exercise but should be weighed against the cost to the Markets, Governments and the tax payer, when things go wrong.

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Comments: (1)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 18 November, 2011, 17:13

In his book "The Big Short", Michael Lewis says that rating agencies are filled with people who tried but couldn't get into mainstream Wall Street firms, and therefore that it was very easy for these bankers to game the rating agencies. Two years ago, in a post titled "Credit Rating Agencies & The Financial Meltdown" in my personal blog, I'd written, "In this subprime mortgage caused financial meltdown, public opinion accuses some players of abject greed and others of downright fraud. But incompetence is a charge perhaps reserved only for credit rating agencies." Recent incidents seem to reinforce this point. 

I've read somewhere that CRAs came into existence when government bond issuers wanted to outsource their obligation towards assuring asset quality. Given that background, it'd be interesting to see your prediction "Soon companies in the credit rating business will be regulated" coming true - it'd amount to a sort of "reverse outsourcing"!

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job title Analyst
location London
member since 2007
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CEO of B.I.S.S. Research, founder of the BISS Independent Accreditation for all systems and services provided to financial services companies internationally. Guest Lecturer at Reading University and...

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