Ratings agencies defend their actions

A top executive from Moody's says investors were warned in 2006 about the increased risk in certain kinds of credit transactions.
In late September, the credit ratings agencies were dragged before United States congressional hearings to answer questions about what role they played in the subprime mess unfolding in America.

The gist of the hearings was questioning whether agencies such as MoodyÆs, Standard & PoorÆs and Fitch perhaps improperly inflated their ratings of mortgage-backed securities because of possible conflicts of interest. After all, the argument goes, the agencies simultaneously rated various mortgage-backed securities while offering advice to investment firms about how to package them so as to gain higher credit ratings.

While executives defend themselves in the US, there is also a fleet of top people from these agencies meeting with journalists in Asia hoping to talk about how things are going smoothly out here. Of course, we donÆt want to talk about that; the questions we are asking are the same ones that congressmen are asking back in Washington.

As a result, credit agencies are all coming out with statements about how they are planning to take these recent problems on board, and perhaps tweak their businesses to be more proactive in the future. They are also announcing their warnings a little louder.

Recently, London-based Noel Kirnon, executive vice president for MoodyÆs Investors Service, was in Hong Kong and warned that the credit crunch may not actually be behind us yet. ôI think weÆre going to see probably more deterioration in performance rather than a return to stability,ö says Kirnon, adding: ôIn terms of credit losses, I donÆt know if we can say the worst is behind us.ö

That makes sense because while financial houses in the US have written off quite a bit of the losses, there havenÆt been that many foreclosures on properties yet. Delinquencies may be increasing, but foreclosures take time (in some states, they can take as long as 18 months) û and with foreclosures come a host of attendant societal problems such as deteriorating neighbourhoods that become dangerous places to venture into, which lowers the value of all the homes in the area.

As for warning investors, Kirnon defends MoodyÆs, noting: ôEarly in 2006 we published a number of special comments that talked about the increased risk we were seeing for certain kinds of credit transactions and we increased credit enhancement, so I think we got the direction right but the magnitude of the performance, obviously, I think was unexpected.ö

The notion that the magnitude was unexpected has been the standard answer from the agencies û but it begs the question û were the warnings loud enough? Should they have been beating the drum a little louder?

ôThatÆs one of the things that we are talking about, do we have to beat the drum a little louder?ö says Kirnon. ôWe publish a lot, we put out special comments, and do teleconferences, but do we have to be more vocal to make sure that people are listening?ö

He goes on to say that the agency is pondering whether it has to say something one month, and then say the same thing the next month again in a slightly different way. ôI think that thatÆs one of the things we need to look at.ö

And what about the allegation that agencies have a conflict of interest?

ôI think we never said it was never a conflict of interest,ö says Kirnon. ôThe question is what do you have in place to minimise those conflicts, and I will say that we have a number of internal checks and balances that have been successful in managing those conflicts.ö

He points out that the ratings are assigned by a committee of people, and that there are separate monitoring teams, as well as random compliance checks. And he notes the same thing his colleagues have reportedly said to congressmen in Washington: That it was in MoodyÆs best interest to maintain a high-standard of integrity and objectivity.

Of course, the fact that heÆs answering these questions in Asia while his colleagues are answering them in the US proves (on the one hand that people are looking for a scapegoat for this crisis) but also that believing in the ratings is of utmost importance to global investors as well.
¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media