USA: Rating agencies need to be tamed
Atul Chatterjee
December 29, 2008
Not long ago Enron collapsed taking away the money of a large number of people. Besides the officials responsible for it one clearly remembers the role of Arthur Andersen in doctoring the accounts. Arthur Andersen also collapsed, so there was not much more that could be done.
In the present subprime crisis it may be Morgan Stanley which has collapsed but a whole lot of others who have been hit very badly. To take an example Cornell University which had an endowment of US$ 108 Billion found itself poorer by US$ 8 Billion. An they have a regular fund management team which manages their fund.
The rating agencies are hired by the owners of assets and then their assets are valued. They give it a rating of BAA- or whatever and this rating is then taken to the market or to specialist fund managers like at Cornell.
Very poor assets have been given good ratings by rating agencies and therein lies a serious problem similar to the tangle between Enron and Arthur Andersen. The rating agencies are not actually independent.
The time has come to evolve a system whereby independent ratings can be made. Regulations need to be made to ensure that. The owner of an asset could declare the amount it is willing to pay to be rated.
Rating agencies (a number of qualified ones) could bid for the project. Instead of taking the lowers cost one an average could be worked out and the contract granted to that bidder.
This would make it possible for a larger number of competitors (at present a few rating agencies dominate the market) to enter the field. The rating agency would no longer have to curry favor with the asset owners.
While this may be a possible mechanism there could clearly be others as well. Whatever there is a need to break the bond between the asset owners and raters
In the present subprime crisis it may be Morgan Stanley which has collapsed but a whole lot of others who have been hit very badly. To take an example Cornell University which had an endowment of US$ 108 Billion found itself poorer by US$ 8 Billion. An they have a regular fund management team which manages their fund.
The rating agencies are hired by the owners of assets and then their assets are valued. They give it a rating of BAA- or whatever and this rating is then taken to the market or to specialist fund managers like at Cornell.
Very poor assets have been given good ratings by rating agencies and therein lies a serious problem similar to the tangle between Enron and Arthur Andersen. The rating agencies are not actually independent.
The time has come to evolve a system whereby independent ratings can be made. Regulations need to be made to ensure that. The owner of an asset could declare the amount it is willing to pay to be rated.
Rating agencies (a number of qualified ones) could bid for the project. Instead of taking the lowers cost one an average could be worked out and the contract granted to that bidder.
This would make it possible for a larger number of competitors (at present a few rating agencies dominate the market) to enter the field. The rating agency would no longer have to curry favor with the asset owners.
While this may be a possible mechanism there could clearly be others as well. Whatever there is a need to break the bond between the asset owners and raters
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