RATING AGENCIES
In the midst of the credit crunch, both credit rating agencies and fund rating
agencies have had to re-think their approach to valuation. Credit rating
agencies in particular have come under serious fi re in the last few months,
writes Maha Khan Phillips
BY: MAHA KHAN PHILLIPS • PROFILES BY: STUART NEWMAN
n July, the US Securities and an investment bank selling a bond, your always be careers available for the best
I
Exchange Commission released job is to highlight things, but you don’t and the brightest. “A common
the fi ndings of its 10-month have to give it marks out of 10. We do, misconception is that rating agencies are
review of three major credit rating and so we are the people who most limited to credit research and analysis,
agencies, Fitch Ratings, Moody’s, obviously got the marks out of 10 whereas in fact they are fairly diverse
and Standard & Poor’s. Th e results could wrong,” argues Richard Hunter, entities with sales people, marketing
not have been more damning. managing director and chief credit people, information product experts,
“We’ve uncovered serious offi cer of Fitch Ratings in London. data experts, as well as credit research
shortcomings at these fi rms, including a Rating agencies have particularly analysts,” explains Chris Dinwoodie,
lack of disclosure to investors and the come under fi re over their valuations of managing director at Standard & Poor’s
public, a lack of policies and procedures structured instruments, such as Rating Service.
to manage the rating process, and collateralised debt obligations (CDOs).
insuffi cient attention to confl icts of Critics have also pointed out that OPPORTUNITIES
interest,” said SEC chairman because the majority of rating agencies Th e majority of roles are within credit
Christopher Cox. “When the fi rms are remunerated by the companies to research however. “Analysts have to
didn’t have enough staff to do the job which they assign ratings, there is an understand the implications of diff erent
right, they often cut corners. Th at’s the inevitable confl ict of interest. Hunter macro economic trends. We rate
bad news. Th ere’s also good news. And dismisses the criticism. “We sovereigns, municipalities, corporations,
that’s that the problems are being fi xed acknowledge that there are always banks, insurance companies and
in real time. Th e recent events aff ecting potential confl icts of interest. But if you structured fi nance transactions. It’s a
our economy and our markets have were paid by investors, you would be very wide group of entities and
galvanized regulators around the world paid by a number of people who also institutions, so we often recruit
to re-examine the regulatory framework have an interest in whether a bond goes economists, accountants, MBA’s, history
governing credit rating agencies, but up or down. Similarly, if we were paid graduates,” Dinwoodie says.
ultimately the responsibility for by governments there would also be a Fitch’s Hunter says the company
providing meaningful ratings to confl ict of interest, because we rate looks for people with a diverse set of
investors begins with the credit rating government debt. Th ere is not a model, talent. “We employ a variety of people
fi rms themselves.” short of setting up a charitable with a variety of skill sets. Th e largest
Credit rating agencies, which assign foundation, which does not have single slice would be people who worked
ratings to issuers of debt, say they potential confl icts. But we make sure in commercial banks, and have lent
accept the rap on the knuckles, but that everyone knows we are paid by the money for a living. We also have people
they are also convenient scapegoats. issuer, and we have a lot of internal who have accountancy backgrounds, and
“Analysts are one of the few people who checks and balances.” those who worked for an issuer. We may
stand up in public and make arguments Despite the current pressure they are also hire someone from the industry
about any company they rate. If you’re under, rating agencies say there will we’re asking them to look at. Th e
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