Regulators can hammer the debt graders if they like. But until investors are willing to treat inflated markets with caution, nothing much will change.
Every market crisis needs a scapegoat. After the dot-com crash in 2000, big accounting firms and investment-bank analysts were hung out to dry.
The whipping boys for the subprime meltdown now appear to be ratings companies such as Moody’s Investors Service, Standard & Poor’s and Fitch Ratings. Already, politicians such as French President Nicolas Sarkozy are calling for the credit assessors to be investigated. Plenty of others will climb on that bandwagon.
Yet they shouldn’t kid themselves that it will fix anything.
There are two snags with pinning the blame on debt graders: First, it’s too late. Second, investors always try to shift responsibility for their own decisions. Until they learn to look more sceptically at the markets, nothing will change.As the extent of the subprime crisis in the US housing market becomes clear, the bond raters are diving for cover.
“We have to ask ourselves the exact role rating agencies should play in mapping risks,” Sarkozy said in a two-page letter on the crisis. “Their role, which allies the creation of these products and the risk assessment, should be submitted to a careful examination.”
‘Cynical view’
Sarkozy and the rest are right to identify something odd about the way the debt graders operate. You would hesitate to buy a used car when a guy gets paid by the vehicle’s owner to say it was fine. Likewise, you should balk at buying a bond when the bank selling it has paid a ratings company to say it is worth the money.
“The cynical view is that you get the best rating that money can buy,” Stuart Thomson, who manages $45.5 billion (23 billion pounds) in bonds at Resolution Investment Management Ltd in Glasgow, Scotland, said in a telephone interview. “They did collude with the banks, so they are complicity in the subprime crisis, and there should probably be an appropriate penalty.”
Virtually worthless
Nobody should object if there were changes. If the raters get punished for being too close to the banks, they only have themselves to blame. If new, independent credit assessors start to win business, paid for by investors instead of issuers, then so much the better. When securities that turned out to be virtually worthless have been given AAA ratings, something has to be wrong. Just don’t think that it will really change anything.
Investors are always trying to pass the buck for what are ultimately their own mistakes. So when Enron Corp collapsed in December 2001, they comforted themselves with the thought that it was all the fault of the accountants, Arthur Andersen LLP, for saying the accounts were solid. Likewise, when the dot-com bubble burst, they said investment-bank analysts were responsible for puffing up the share prices of flaky Internet businesses.
Inflated real estate
Now, in much the same way, fund managers are blaming the ratings companies for the way they bought securities based on an inflated US property market. And yet, people have been warning for years that US real estate was dangerously overvalued.
If you bought into it, surely you only have yourself to blame. Investors have to take responsibility for their own decisions instead of accepting someone else’s judgment of whether a stock or bond is sound. A company doesn’t necessarily make huge profits even if a big accounting firm says it does. A technology company isn’t still a “buy” when it has a price-earnings ratio of 500, even if the ritziest investment banks say it is.
And, for that matter, lending lots of money to poor people with a record of not paying their debts is risky regardless of how many A’s a ratings company stamps on the bond issue. Regulators can hammer the debt graders if they like. But until investors are willing to treat inflated markets with caution, nothing much will change.
