A Solution for Ratings
Published in Les Echos
(France) on 19 August 2011
by Jean-Marc Vittori (link to original)
The chase for credit reporting agencies reopened early August in the United States. The shots are concentrated on a shameless volatile, Standard and Poor’s, who dared to state the obvious: It is not quite sure the U.S. Treasury can repay its debt on time. The policeman of the financial markets, the SEC, has opened an investigation. In Congress, some elected officials are seeking a new law. Opportunely, the press made some previous investigations, supporting the system of structured products which was the cause of the financial crisis of 2007-2008. It is by far the most serious reason to get out the rifle. When the agencies had some scandalous practices, their methods were misleading to validate their financial titles — a validation which brought them in a lot of money. And yet, they had earned more money selling advice to the manufacturers of these new products … to obtain a better rating. Beginning in 2008, twelve companies in the world had the best rate possible, the famous AAA, while the 64,000 structured products were making them a profit!
But the ratings agencies have done the work in that area. And it would be unjust that they be the only scapegoat in this crisis because they undeniably constitute only one link on the chain.
The real problem of the ratings agencies is that they have too much of an influence. This influence does not come from them, but from the national and international regulators who have riddled their wording with references to their terms (such financial product or such balance sheet from a financial institution must contain at least a proportion of AAA paper). Passed last summer in the U.S., the Dodd-Frank Act imposes on all government agencies, including the Federal Reserve, the responsibility to regulate and remove these references. It is urgent that the European Union makes the same decision. Then, it will be essential that the government regulators accomplish this complicated job of mending their streak. But this will not suffice because the private sector has often also adopted such principals. For example, the majority of U.S. pension funds show some explicit reference to the ratings. To move forward, regulators could create some ceilings instead of floors. Item by item, the bankers, insurers, and funding managers would be entitled to a new maximum level of money invested solely on the basis of the system of 10 percent, for example. For the remaining percentages, they should be able to prove that they have determined that their investments grow from a real and serious substantial risk assessment. In a way, they would be obligated to return to their core business. Then we will be able to stop the chase of the agencies and move on to serious matters.
But the ratings agencies have done the work in that area. And it would be unjust that they be the only scapegoat in this crisis because they undeniably constitute only one link on the chain.
The real problem of the ratings agencies is that they have too much of an influence. This influence does not come from them, but from the national and international regulators who have riddled their wording with references to their terms (such financial product or such balance sheet from a financial institution must contain at least a proportion of AAA paper). Passed last summer in the U.S., the Dodd-Frank Act imposes on all government agencies, including the Federal Reserve, the responsibility to regulate and remove these references. It is urgent that the European Union makes the same decision. Then, it will be essential that the government regulators accomplish this complicated job of mending their streak. But this will not suffice because the private sector has often also adopted such principals. For example, the majority of U.S. pension funds show some explicit reference to the ratings. To move forward, regulators could create some ceilings instead of floors. Item by item, the bankers, insurers, and funding managers would be entitled to a new maximum level of money invested solely on the basis of the system of 10 percent, for example. For the remaining percentages, they should be able to prove that they have determined that their investments grow from a real and serious substantial risk assessment. In a way, they would be obligated to return to their core business. Then we will be able to stop the chase of the agencies and move on to serious matters.
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