The recent crisis in the financial market defied the history of many companies as we knew them and created another for us to narrate to our grand children as a horrifying story of our times.
Not going into cause and effect story once again, let us look directly into the subject matter of the write-up. One of the entities blamed for the cause are the credit rating agencies (CRAs), other being the regulators.
So, what do you think? Are the CRAs to be blamed for what has happened or did they perform their task in the very manner they are expected to?
I here, take a different view than what most expert on the subject matter speaking and take a stand that the CRAs cannot be blamed.
The CRAs gave AAAs and AAs to most of papers which turned out to be toxic assets later on. But does that mean that their whole process of rating was wrong? I don’t know. I leave upon you to decide. I have a question, why have we not raised question on the role of the board of directors (including independent directors) who more than anybody knew what was going on; raised question on the functioning of the audit firms who proudly sign without even caring about knowing what and where they are signing; those equity research guys, who believe they know everything about the stocks they track, and specially those media people who make stories larger than life and make fool of people like you and me. We need to understand that CRAs are also run by human beings like us; they are no special people, who can read what’s hidden in each number.
But, if we take my last point and move forward, then, we cannot expect anybody to come forward and accept their fault, because it’s a human error.
So what do we do?
We make rules and regulation of what the duties and responsibility of each one of us are, be it individuals or institutions.
Can we all make the rules and regulation?
No.
So, who will do that? The government has to appoint regulators; but we already have them, now what?
If we analyse the situation what we see is a flaw in the whole functioning of the CRAs and their client. For CRAs, the clients are the companies which come to them to get them self the (best) rating (possible), and since they pay the CRAs, the CRAs feel a moral duty to please their clients. That’s what has happened and I don’t see any reason for us to blame them for anything that, as a customer, even we would like (to get special treatment).
So what’s the way out?
There are many things in my mind, but each has its own drawback. I would present the one that is clear enough in my mind to present it to you. How about, only one rating agency in each country and the price being fixed by the regulatory authorities? Sometimes monopoly can serve better than competition. I know there are lots of ‘What if’ questions that are not answered, but to be frank with you, I don’t have any answer for those questions as of now, but we surely will find right answer as the time passes.
