RATING AGENCIES - WILL THEY FINALLY BE PROSECUTED FOR 2008 CRISIS?
By Ruma Dubey
Finally! Almost four years after the global economy crashed, from which we all to yet to fully get out, a culprit has finally been found! For bringing about the biggest crash in recent times, not a single institution or individual has been prosecuted and the biggest grouse at that time was about the role played by the rating agencies. Finally, the US Govt has slapped a $5 billion law suit against Standard & poor’s for exaggerating mortgage bond ratings in 2007. And the other two – Moody’s and Fitch are on tenterhooks as they too fear hefty penalties after the US Justice department alleged that S&P knowingly kept the ratings in high-risk mortgage securities high in order to win revenues from issuers. Though it has not named Moody’s or Fitch, there is the big question whether their role will also come under scrutiny. In fact the New York Attorney General has initiated an investigation into all the three rating agencies prior to 2008 crisis.
It is gratifying to note that the Justice Department has finally woken up to the role played by the rating agencies in 2008 collapse; better late than never! All over the world, people had questioned the integrity of these three and the big question which dogged all was – how could they have granted triple A ratings to mortgage based financial securities even when the housing markets had collapsed. It was crystal clear to all that these rating agencies had misrepresented the true credit risk, keeping their own selfish interests in mind. Otherwise how do these agencies explain the fact that all these “Triple A” rated issues were in default within a year of this rating? At that time itself, it was clear that these rating agencies were actually at the heart of this entire financial collapse. But over a period of time, people got busy trying to save their homes and jobs and this got buried deep. But the hurt and mistrust which these rating agencies had created just refused to go. And it is good to know that the US Justice Department has finally got them by their collar, hauling them up for putting the entire world in an economic crisis.
Rating agencies are like up there on a pedestal; no one dare touch them. And they have been taking umbrage in the fact that these ratings were “opinions” and it was all about freedom of expression and this defense for so many years could just not be pulled down. But the very logic of these rating agencies work comes into question. How do these rating agencies rate products designed by the very banks from which it gets get paid? Isn’t that a major conflict of interest? Even though the rating agencies vouched for “objectivity” it obviously looks like it lost its very objective. It was but obviously working for banks which they helped give good ratings for bad products. Competition was so intense, if S&P did not do it, Moody’s would it or Fitch would do it. So the fear of losing business was so high that most agreed to do things which were totally against the very grain of their business. In fact the Department of Justice, while prosecuting S&P has quoted several emails showing how S&P fretted about losing business to Moody's. This was just like how Merrill Lynch put bad mortgage products together so that it could outdo the profits being earned by Goldman Sachs.
This battle for more, greed being the propeller to all evils is not new. If there are rules, many heads will come together to find loopholes. That’s human nature. Here, though the Department of Justice has acted too late, at least it has acted. As such rating agencies have lost their credibility post the 2008 collapse. Most banks and trading floors have stopped depending on official bond ratings. In fact, BlackRock, one of the largest investors of Federal bonds does its own analysis and does no rely on these rating agencies. Just as banks have stopped relying on Libor, these rating agencies have lost their relevance long time ago. They are mere “technicalities”. But it would be an excellent move to make an example of bringing the guilty to justice – too small and too late but at least some closure.
And to think that we Indians and the Indian Govt is worried about what S&P and Moody’s or Fitch says when they themselves are today in the line of fire. But the good part here in India is that at least that fear of “international image” gets the Govt working.
Yes, any analyst who signed off junk as AAA securities needs to be prosecuted unless he can prove that they took all reasonable steps to confirm their rating.
Biggest lesson learnt from the collapse – do not invest in anything that you do not understand!