Credit agencies. Keeping the light of big business burning. Or not.
As the Commons Treasury Select Committee prepares to assess the activity of credit rating agencies, BBC’s File on 4 sought to explain the complex role that credit agencies play in the financial sector and unmask the decision processes behind their ratings.
Last night’s radio documentary tracked the evolution of credit rating agencies from an independent measure of risk for potential investors to a service increasingly vulnerable to manipulation.
Agencies such as Standard & Poor’s, Moody’s and Fitch take a fee for offering independent opinion on the level of risk waged against government or corporate bonds.
For years these opinions went unquestioned. However, recent events including the big bubble burst of the sub-prime US housing market and the collapse of major banks like Northern Rock and Lehman Brothers have resulted in renewed scrutiny of the performance and responsibility of credit agencies.
So who are these agencies and can their ratings be trusted?
File on 4 went ‘inside one of the leading credit rating agencies’ to find out exactly how decisions over a credit rating are taken. Essentially, this involved speaking to Standard & Poor’s Head of Communications, Martin Win, at their European headquarters.
To arrive at a credit rating agencies employ analysts to assess the finances of the organisation in question. Win described the conference sessions leading to a ratings decision as a democratic, informed process. ‘[It is] a very extended, exhaustive and a very serious exercise. At the end of the committee process a vote is taken and the majority vote carries the day,’ he said.
However File on 4 also spoke to a William Harrington, a former senior analyst who resigned from Moody’s rating agency. He had a different take on the decision making process.
Harrington outlined the many ways that ‘a senior person can try and marginalise a junior person. During committee voting, if junior analysts were going to vote in ways that managers might not like, they might grimace…these managers had pretty much full discretion over our annual review.’
Indeed, quotes taken directly from the texts and emails of financial analysts, seen by the File on 4 team, revealed a flippant complacency about weak standards in practice:
‘It could be structured by cows and we’d rate it.’
‘Let’s hope we’re all wealthy and retired by the time this house of cards falters.’
Hearing these comments will hardly lessen the anger felt by investors who lost tens of thousands of Euros when the Italian company Parmalat fell bankrupt in 2003.
One such investor told File on 4 of his incredulity that Standard & Poor did not downgrade the company’s credit rating until days before its collapse, despite reports that unpaid bills had been stacking up for months.
Although the story of Parmalat involved fraudulent activity not recognized by auditors, following legal action Standard & Poor’s were still subsequently ordered to return fees earned from rating Parmalat.
This case raised important questions about the extent to which credit rating agencies should be required to verify the information used to decide ratings. Frustratingly this could have been addressed in greater detail during the documentary.
The File on 4 is well timed, earlier this week the role of credit agencies came under fire from the Commons Treasury Select Committee, with Andrew Tyrie MP stating that agencies had been ‘systemically wrong’ in their analysis before the banking crisis.
The wide-ranging and informative documentary also tackled the politically sensitive issue of sovereign ratings and queried whether systematic reforms would be enough to mitigate the negative impact of a downgraded rating.
The world of credit agencies can seem remote from everyday life, removed as it is in a world of jargon and figures. However File on 4′s programme revealed the importance of an awareness of just who is making the decisions that drive the economy and effect us all.
