I came across this interview of Deven Sharma, President, Standard and Poor’s (S&P) done by Niranjan Rajyadhaksha of Mint. The interview is a must read to understand how overconfident credit rating agencies have on themselves.
There have also been calls for more regulation of the ratings business.
There is a view that rating agencies need more regulation and we appreciate that. But we should be left alone as far as our analytical process goes.
A lot of people tell us that we did not know that the products we bought were that risky. But who is responsible for product suitability? Some of the data that went into the rating of residential mortgage securities was not good. Banks and originators, too, have a role to play.
But surely the buck should stop with the credit rating agencies?
We cannot take on the role of the auditors. We need to have standards to ensure that issuers and originators are doing due diligence and then we have to incorporate that into our ratings. Due diligence and auditing has to be done by a third party.
I mean what stopped them to tell investors “Don’t invest it is risky”. As long as it brought fee incomes, all basics were ignored. And now blaming banks and data. Moody’s tried to save itself calling it modelling errors
. Credit Rating Agencies are getting really messy and need to be sorted out. Their business is to get a rating and help people make better investment decisions. If they didn’t have data should have said so, above all they gave AAA ratings.
And the best of all questions, asked really well.
Has there been any soul-searching at Standard and Poor’s after the credit crisis?
When I took on this role in September 2007, I decided we should have no historical boundaries and start with a clean sheet. I asked: “What is it that we could have done to avoid such as crisis?” I asked our teams to think about it and also had discussions with outside agencies.
It became clear that more transparency is needed. Take residential mortgage-backed securities. We did consider the possibilities that housing prices in the US would decline, but the market thought we had only assumed that housing prices would keep going up. We have decided that any stress tests we do, or assumptions we make will be transparently revealed. Or if someone comes to us and then chooses not to be rated by us, we will make that public. The basic idea is to put more information in the hands of investors.
But some assumptions did not work out.
It was almost impossible for us to predict a national housing recession in the US. This is the first time since the Great Depression that we have had a national housing recession. We have decided to give out our “what if” scenarios, so that investors can gauge what may happen under different conditions. We cannot predict a tsunami, but we can give early warning signals.
Yeah. that was what was needed . Some soul searching. However the answer was a cliche. In times of Enron they promised the same. Now they say they will publish assumptions. I mean who will understand the assumptions of the fancy models they use?? What is the purpose of making an assumption and then saying. Agreed assumptions did not work and reality was far different but when you didn’t have data why give it any rating.
In all, some serious soul searching is needed. You just can’t make so many