Rating the raters? Follow the meerkat!
Jinfo Blog

By Tim Buckley Owen

Abstract

There’s a wildly popular advertising campaign in Britain at the moment featuring talking Russian meerkats (no – really!) encouraging consumers to compare financial services. Now the European Commission seems to be taking a leaf from the meerkats’ book by setting up its own comparison site for credit rating agencies – which currently seem to be harried on every side.

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There’s a wildly popular advertising campaign in Britain at the moment featuring talking Russian meerkats (no – really!) encouraging consumers to compare financial services. Now the European Commission seems to be taking a leaf from the meerkats’ book by setting up its own comparison site for credit rating agencies – which currently seem to be harried on every side.

Lack of transparency is the driver behind the creation by the European Securities & Markets Authority (ESMA) of the Central Rating Repository (CEREP). CEREP’s aim is to help regulators compare the performance of the ratings agencies that ESMA supervises and reduce the cost of information for market participants; there’s no get-out for the agencies and they’ll be held responsible for the accuracy and completeness of the data they supply.

Meanwhile across the water the United States Congress continues to quiz Moody’s and Standard & Poor’s over their failure to predict the collapse of the brokerage MF Global (LiveWire background here). According to the New York Times Dealbook, the dismal performance of the two big players was in contrast to that of the smaller Rapid Ratings, which – paid by investors rather than the companies it rates – had been warning about MF Global for two years.

Consumer credit rating is also currently in the spotlight in the States, where the Consumer Financial Protection Bureau (CFPB) is planning to include consumer reporting agencies (such as Experian or Equifax) and debt collectors under its non-bank supervision programme. “This oversight would help restore confidence that the federal government is standing beside the American consumer", said CFPB Director Richard Cordray – ominously, one might think.

Away from the regulators and in the industry itself, nimbler and more open newcomers present a further potential threat. Kroll Bond Ratings has recently released its methodology for rating American credit unions; with a mission to “restore trust in credit ratings” (LiveWire background here), transparency is Kroll’s trump card.

Now the Wall Street Journal reports (subscription required) that Kroll has also been hired for the first time to rate the established players’ nemesis: commercial mortgage-backed securities (CMBS). They should be worried; in a recent seminar conducted by the Centre for the Study of Financial Innovation, the investigative company’s veteran head Jules Kroll accused the Big Three of reckless irresponsibility, compounding their offence as “the enablers of the crisis” by refusing to apologise.

Perhaps it’s no surprise, then, that one analyst at least – Zack’s Equity Research – regards Moody’s fourth quarter results as “disappointing” or that Standard & Poor’s has decided to dispense with the services of Barbara Duka as head of its CMBS group. Taken all round, it looks as if what used to be a fairly stable marketplace is due for some significant disruption.

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