Institutional Investor's Alpha Magazine - May 2008 - (Page 39)

Regulation Credit Rating Agencies Sentinels Go Astray By Darrell Delamaide When W hen the top brass of the world’s three biggest credit rating agencies were summoned to Washington by the Senate Finance Committee for a public grilling on a gray morning in late April, only one CEO showed up. To the growing ranks of skeptics of the credit rating industry, this seemed a blatant sign of a deeply entrenched arrogance rooted in an oligarchy of ﬁrms that for too long had not been held accountable for its work. For months an international hue and cry had been raised in response to the subprime mortgage crisis. Critics at home and abroad were becoming increasingly vocal in lambasting the bond rating agencies, arguing that they had failed miserably at their duties by overvaluing all sorts of bad debt and issuing ratings that had led unsuspecting investors astray and perhaps even ruined some. Included in the broadsides were assertions that the agencies were guilty of conﬂicts of interest, issuing ratings on pools of structured debt that the agencies themselves had helped construct in hopes of expanding their market share. The big bond rating agencies’ inﬂuence on investors is hard to overstate. Historically, they have been a crucial source of information for mutual funds, foundations, pension funds, hedge funds, even mom-and-pop bond buyers. But the recent criticism generally has it that the rating agencies — vital as they are — are often misinformed and seldom up to date. Democrat Charles Schumer, the senior senator from New York, was livid at the April hearing, demanding to know why the chief executives of Moody’s and Stan- dard & Poor’s hadn’t shown (Stephen Joynt of Fitch Ratings was the sole big-three CEO in attendance). “This is really serious stuff, the whole world is focused on these issues,” Schumer fumed. “For the CEOs not to come is very disappointing. They should be here.” S&P and Moody’s, it seemed, had blundered by sending, respectively, an executive vice president and a managing director. DefCritics blame the rating erence to the powers that be, after all, is probably agencies for failing the wisest strategy when the tide of public opinto spot fundamental ion turns. Detractors of the credit rating agencies weaknesses that led to have since called for manthe current credit crisis. agement changes, and in early May, Brian ClarkNow they are calling son, COO and president of Moody’s, resigned. In for reforms like those recent years he had gained imposed in the wake of a certain notoriety for imposing new methodolothe Enron debacle. gies that assigned higher ratings to many mortgages and helped Moody’s increase its share of the market. His departure was met with approval by Schumer, among others, who said it gave Moody’s “a fresh chance to root out the practices that presented blatant conﬂicts of interest.” Already, anger at the rating agencies resembles that MAY 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 39

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - May 2008

Institutional Investor's Alpha Magazine - May 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Send in the Clones The Good Guys: Outside the Box Cover Story: Welcome to Oz Interview: The Tipping Point Regulation: When Sentinels Go Astray Strategies: Taking Credit Research Center: The Hedge Fund 100 Book Excerpt: Shoot the Messenger Alpha Bytes: VaR Enough? Unhedged: Commentary: Not Your Father's Activist

Institutional Investor's Alpha Magazine - May 2008

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