Credit Ratings- Confusion Continues
On Monday, June 8, 2009 9:57 by Sudip BandyopadhyayCredit rating agencies have been among the whipping boys of the financial crisis. They have been criticised for what they were responsible for – awarding triple A ratings to securitised debt products they did not understand. They have been criticised for what they were not responsible for – investors’ overreliance on ratings to guide investments. And they have been criticised for their “issuer pays” business model, which even agencies admit is riddled with conflicts of interest. Even Warren Buffet – who has a 20 per cent stake in Moody’s and normally wears, eats and reads the products made by companies he owns – says he does not believe in using its ratings. Increasingly, other investors believe the same.
Under Basel II, agencies were unwittingly but profitably plugged into the regulatory process as their ratings were used to gauge the riskiness of banks’ portfolios. This quasi-regulatory role will rightly diminish. The Bank of England has said it will think “very hard” about its reliance on ratings. Sure, agencies will continue their mostly accurate work rating sovereign and corporate bonds. The way they earn a living may also remain unchanged: Investor – or regulator-pays alternatives have conflicts of interest too. Rethinking on the role, structure etc hasn’t yet thrown up any acceptable & viable alternatives.
