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.
Well I do understand the allegations being levied on CRAs, but its no use to cry foul at them since they did what they could with all the resources available to them. I know there were errors committed, some deliberately and some unknowingly and the SF rating procedures were not fool proof.
ReplyDeleteBut still it is not the duty or CRAs to shout at the auditors, where they went wrong was in understanding the complexity behind those assets rated. It was like giving a $1 loan to a friend in school about whom you knew that his daddy is a millionare, you never really trusted his credibility but still you relied on his dad.
The procedures turned out to be flawed, but I do not agree with the comment saying that ratings are done to please clients.
Over and above that which government do we want to regulate the agencies, the same which had Alan Greenspan as the FED boss or the same which let ENRON survive to the point it did.
So things ain't so simple I suppose, more number of rating agencies will bring in transparency through competition. Look at how Fitch has developed itself.
Rating agencies are improving and I think they will improve upon the things of the past.
P.S. "Perfection of systems is an utopian idea, the very base of existence of developments has been errors and defects."