Joynt, Moody's McDaniel and standard & poor's sharma are
sworn in before testifying before the House Oversight and
Government Reform Committee on Capitol Hill.
Rating agencies have far too much power. Almost every day we
read that they’ve downgraded the sovereign risk of a particular
country or the credit risk of a private company. And very often
their negative reports that frequently have little basis in
reality can infect investor sentiment. They must also accept
their share of the blame for the subprime mortgage crisis that
triggered the current global slowdown.
In truth, I used to avidly study reports published by rating
agencies and would urge my management team to give them due
consideration. Now, I believe this US$ 5 billion industry,
dominated by three mega firms (Standard & Poor’s, Moody’s and
Fitch) is seriously flawed.
Indeed, the former Managing Director for the credit policy at
Moody’s admitted as much to the House Committee on Oversight and
Government Reform when grilled about his former company’s poor
assessment of mortgage-back securities. “The business model
prevented analysts from putting investor interests first,” he
A former head of mortgage ratings at Standard and Poor’s was
even more explicit, saying, “Profits were running the show”. It
certainly seems so when as much as 40 percent of one of the
largest rating agency’s revenue was derived from assessing such
The Committee’s Chairman Henry Waxman summed up the testimony.
“The story of the credit rating agencies is a story of colossal
failure,” he said. “The credit rating agencies occupy a special
place in our financial markets. Millions of investors rely on
them for independent, objective assessments. The rating agencies
broke this bond of trust…”
Similarly culpable for hurtling economies and markets into
unknown territory are irresponsible banks, opportunistic
short-sellers, negligent auditors, feeder fund managers and
financial analysts. It seems also that the US Securities and
Exchange Commission responsible for oversight has been asleep at
the wheel. These are all bodies and individuals we once trusted.
If there is any silver-lining to this ongoing financial mess it
is that lessons have been learned. European governments and the
US have reacted decisively to this ‘colossal failure’ with
strict new rules designed to hold rating agencies liable.
Nevertheless, I believe such moves are too little, too late.
Rating agencies have proved to be unreliable, primarily
profit-driven and far from impartial. They have been given free
rein to affect the livelihoods of millions of ordinary people
around the world. They have abused people’s trust and caused
untold hardship. In future, I will be taking their advice with a
massive shovel of salt and especially in the light of the fact
that some rating agencies continue to spout their uninformed
judgments even while they are on the verge of bankruptcy
themselves. How ironic is that!
Similarly, we should be highly skeptical of financial gurus and
especially so during these unpredictable, volatile times when
economies and markets have deviated from time-honoured patterns.
In this climate, their predictions often turn out to be
worthless at best while, at worst, they can erode the standing
of viable companies and erode people’s life-savings and
retirement plans. Such misleading analyses have unfortunately
led unknown numbers of gullible investors to their doom.
My question is: Is there no regulatory body that can govern this
hit-and-miss profession; one that is authorised to bring
analysts that cause harm to book? In my opinion, this breed of
soothsayers masquerading as informed insiders is one of the
foremost causes of damage to credible companies and countries.
I’m amazed that the media lends them so much credibility and
often offers a platform to slick-talking youngsters armed with
impressive diplomas but little experience.
As we are all aware, newspapers love attention-grabbing
headlines that compare the current situation to the Great
Depression of 1929. Few editors care what effects such
sensationalism will bring about because, after all, hype and
drama attracts readers. I am certainly not advocating the
concealing of factual news. On the contrary, I want more
openness. My concern is that investors should not be exposed to
information derived from questionable sources.
Now that so many have been burned by rating agencies and
financial analysts, it’s time we relied upon our own instincts
after taking advice from knowledgeable people that we know for
sure have our best interests at heart. We should also demand
transparency and accountability from corporations so that market
confidence can be restored.
There’s no getting away from it. Economies are largely built on
trust and sentiment. Ultimately, we will have to learn to trust
again. But, hopefully, we will emerge from the turmoil wiser,
more cautious and with heightened skepticism. In any event,
rating agencies and financial pundits should never be given the
opportunity to intentionally or unwittingly mislead us again.