Rating agencies came in for fresh criticism yesterday for their role in recent financial market turmoil. Walter Kielholz, board chairman of Credit Suisse Group, argued yesterday that the rating agency sector lacks sufficient competition. “They are paid by the wrong people”, he said. “There should be more competition. If you only have two ratings agencies which share the (same) assumptions they can be completely wrong.”
His criticism was echoed at a meeting of the Institute of International Finance by David Rubenstein, co-founder and managing director of the Carlyle Group. “Rating agencies do not pay their staff well enough and the staff are overextended”, he said.
Their comments came in the wake of the strong attack launched on rating agencies by former IMF managing director Jacques de Larosiere, who argued on Saturday that “if rating agencies cannot provide an adequate picture of looming potential risks, isn’t there a case for more preventive action through regulation or at least through disclosure?”
But Baudoin Prot, chief executive of the BNP Paribas Group, sprang to the agencies’ defence. Originators of financial products should be held responsible for problems with those products, he argued. “Half of mortgage originators are unregulated. They should be properly regulated,” Prot told the IIF conference. “Basel II standards should be applied to arrangers”, he said. “Finally, the ultimate consumers of financial products should be more wary. Investors should not rely only on rating agencies, they should study what they buy,” Prot said.
Asked for comment, Standard & Poor’s managing director David Beers told Emerging Markets: “We are not the author of the regulatory usage of ratings and we have never sought that role.” Beers who is also S&P’s global head of sovereign and international public finance ratings, declined to comment further.
But a company spokesman added that a new regulatory framework passed by Congress became effective in June. “It is working well and should be given the chance to prove itself.” Asked at an S&P seminar yesterday what lessons rating agencies had learned from the recent financial system crisis, Beers said: “We learn from any market disruption and incorporate that into our analysis.”