More woe for the credit industry
Jinfo Blog

14th July 2008

By Tim Buckley Owen

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Harried on every side, credit rating agencies face a much tougher future if regulators get their way. The subprime crisis may have been the trigger, but the malaise goes much deeper, isn’t simply about accuracy, and affects personal as well as corporate credit. Earlier this month, the United States Securities & Exchange Commission released the results http://www.sec.gov/news/press/2008/2008-135.htm of its investigation into shortcomings in the main agencies' practices and disclosure to investors. Some agencies appear to have ‘struggled’ with rating some of the newer financial products since as far back as 2002, it concluded. Agencies didn’t always document significant steps in the ratings process either, including the rationale for deviations from their models. In fact, as SEC Chairman Christopher Cox reported, ‘When the firms didn't have enough staff to do the job right, they often cut corners’. Even tougher talk comes from this side of the Atlantic, as European Internal Market Commissioner Charlie McCreevy gets ready to propose this October a registration and external oversight regime for rating agencies. He’s set out his thinking recently in two uncompromising speeches – http://digbig.com/4xegb and http://digbig.com/4xega. Dismissing the International Organisation of Securities Commissions Code of Conduct, to which the rating agencies have signed up, as ‘a toothless wonder’, he said: ‘Endless procrastination is not my style... I intend to move forward purposefully rather than allow clever lobbyists manipulate or slow things down in the interests of their clients.’ Meanwhile Moody’s has its own special problems. Initially exposed by the FT last May http://www.vivavip.com/go/e6363 it has now admitted http://digbig.com/4xegc that a ‘coding bug’ led it to incorrectly award triple-A ratings to about $1bn of complex instruments known as constant proportion debt obligations (CPDOs) in 2006. Now Standard & Poors has also told the FT that it has created an internal committee to oversee how the agency uses complex computer models. But the wider credit checking industry’s troubles don’t stop there. A new report on data sharing, commissioned by the UK’s Ministry of Justice http://www.justice.gov.uk/reviews/datasharing-intro.htm suggests that retailers and service providers frequently collect far more information on individuals than they actually need to safeguard a transaction. Specifically, the report calls for an end to the edited electoral register, which identifies from official sources the address of any elector in the UK who doesn’t actually opt out, and can be put to any purpose whatsoever by anyone – typically by direct marketers. It also wants an enquiry into online services that aggregate personal information. All this high profile activity means that information users are likely to demand more safeguards about the accuracy and completeness of the information they receive. Information professionals will need to be ready with pretty good justifications of their decisions on what they choose to provide.

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