Does Triple A mean anything any more?
Jinfo Blog

19th March 2008

By Tim Buckley Owen

Item

It’s been apparent for some time that the credit rating agencies have contributed significantly to the current banking and finance crisis – see http://web.vivavip.com/forum/LiveWire/read.php?i=1844 or http://web.vivavip.com/forum/LiveWire/read.php?i=417 for background. But now as it deepens, pulling in Bear Stearns and who knows who else in the near future, authoritative bodies on both sides of the Atlantic have coincidentally published their initial views on the matter. First off was the UK House of Commons all-party Treasury Committee, with a report entitled Financial Stability and Transparency – press release at http://digbig.com/4wpre and full report at http://digbig.com/4wprg. The Committee called for ‘root and branch reform’ of the agencies’ business model to tackle ‘perceived conflicts of interest’, and carried a stark warning: erect effective Chinese walls or face new regulation. Welcoming Bank of England proposals to improve the information content of ratings, the Committee criticised investors’ over-reliance on the agencies, compounded by a lack of due diligence in the products they were purchasing. Many investors took a triple A score as a ‘green light’ to invest, the report concluded. MPs were also unhappy with the state of competition in the credit ratings market. The competition authorities should examine what barriers to entry have prevented greater competition in the industry, they said, and how competition could be encouraged. Ten days later came a Policy Statement from the US President’s Working Group on Financial Markets – press release at http://www.ustreas.gov/press/releases/hp872.htm and full report at http://digbig.com/4wprk. Like the British MPs, the US Group called for proper procedures for managing and disclosing conflicts of interest, and warned that it would ‘revisit the need for stronger oversight if the industry-led reforms do not lead to the integrity and transparency we seek’. It agreed, too, that institutional investors and their asset managers should develop an independent view of the risks associated with their portfolios, rather than relying solely on credit ratings. And it stated that the agencies should disclose what qualitative reviews they performed on the originators of such securitised products, and publish sufficient information about the assumptions underlying their rating methodologies to enable users to understand how a particular rating was determined. Credit rating processes additionally needed to clearly differentiate between ratings for the structured products that have been at the root of the current turmoil, and those for more conventional investments such as corporate and municipal securities. There had been ‘a significant erosion of market discipline’ by all those involved, it thundered. Will all this be sufficient – assuming that it happens? It’s probably far too early even for the experts to decide while the crisis is still at its height. But, with our growing compliance role, this is not a good time to be reactive; corporate information professionals should be in the debate.

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