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Who’ll do the job of ratings agencies?

Named, shamed and blamed, ratings agencies are looking a little ragged around the edges. Investors themselves may need to hire people to calculate credit risks in future.

With triple A no longer a water-tight guarantee of a leak-free investment, ratings agencies could find themselves squeezed as investors take a more proactive role in analysing just what they’re getting themselves into. This, at least, appears to be what Ben Bernanke had in mind when he called for investors to take independent views on securities.

Adam Goff, managing director of research at the Russell Investment Group, says the time will soon come when fund managers realise there are profits to be had from investors building their own teams of analysts: “There’s a lot of opportunity out there and organisations who are willing to build credit analysis teams in house will be able to make money out of that.”

Asset management recruiters say there’s no sign of a rush of hiring just yet. “The consultants were pushing this model three or four years ago. Most of the big funds built up teams of seven to eight sector analysts to look at fundamental credit default risk, but ultimately these guys don’t make any real money or returns for the fund manager and some of the less stable teams have fallen apart,” says one.

In the meantime, ratings agencies are already feeling the pain. Moody’s, DBRS and Standard & Poors were all said to have cut jobs back in January, making now a far cry from the salad days of fast growing structured credit business and wrestling in fat suits.

Comments (5)

  1. Surely a classic case of moral hazard. A good internal risk team is the only way to get credit risk quantified in a timely manner – not 3 minutes before the event has happened. It’s not the fault of analysts at agencies, more that agencies face external pressures from those entities they are rating and others with significant interests. However, there is a more fundamental problem that even when the risks are stated, return focused individuals will always choose to ignore it.

    If the agencies had been saying what they believed and not what they believed the market wanted to hear, then they would now be reaping the rewards of increased respect and growing the client base.

  2. Rating agencies should not depend on issuers/investors alone for revenue. Monetary support for rating agencies from the regulator, in return for a tighter supervisory oversight is well in order.

  3. Market participates should go into a serious reflective mood, re-think their roles and business strategies, and stop nagging the regulators… they are not God! banks/funds have their own internal risk teams + risk management teams(market, credit, operation, any risks you can name)…in additional to rating agencies! So what went wrong? The academic knowledge, or in one word – models -that rating or risk management rely on do NOT differ that much if you are technical enough to understand what I mean… (to prove myself, as ex-rating, I attracted plentiful of risk management role job offers). Whether the well known misalignment of interest is eliminated or not, it won’t help improve the nascant risk management technology, to be fair.

  4. I think the governments should take a hard look to nationalise the agencies and have them operate in a way that protects the financial system from greedy investment bankers and opportunistic slash and burn warriors. In the end the tax payer has to pay for the incapable rating agencies who -and this will come out in future investigations-have colluded with issuers to the point of accepting bribes or other “favours”. Independence of judgment cannot exist when you are 80% dependent on issuers’ fees and usually the issuer will select the agency which offers the best rating for the worst credit. This is why Laggards such as Fitch which normally are not retained and paid by the issuer produce unsolicited ratings which are usually 0ne notch higher than the other paid agencies. The reaso nfor that is simply to convert this into a paid rating. I would advise every bank or investor to invest heaviliy in their own credit analytical capabilities as most analysts in agencies are very junior, normally have been in their job for less than a year and are so badly managed that they leave after one or two years to join a bank.
    Their reputation is damaged beyond repair and therefore drastic action.

  5. i agree that rating agencies should be nationalised. a pay scale corresponding to that of state school teacher’s pay should be put in place.

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