The Security and Exchange Commission (SEC) alleges that the small rating agency, Egan-Jones, made material misstatements in a 2008 regulatory application.
An attorney for Egan-Jones, Alan Futerfas, said that the agency intends to contest the SEC’s administrative charges.
Reuters quotes Futerfas as saying, “I think this does a significant disservice to the investment community. I think it is grossly disproportional to any possible error in any four-year-old application. And we intend to vigorously contest these allegations.”
The specific charges include misrepresenting the firm’s rating experience, conflict-of-interest policy issues, and a failure to keep certain books and records.
Egan-Jones has been quick to downgrade sovereign debt among established countries, including the United States. “Has Egon-Jones been targeted? Let’s hope not.”
The Wall Street Journal reports that French government officials denied receiving any notice of a sovereign-rating downgrade.
One official speaking anonymously said, “There is absolutely nothing new.” The government has “no information in that regard from any credit rating agency whatsoever.”
Another said, “the rumor of the downgrade is unfounded,” adding that “There is no new information from any rating agency that would point in this direction.”
The comments came in reaction to investors speculating that France’s AAA rating may be downgraded. Citibank analysts said that they believed Moody’s was planning to put their rating “on review for a possible downgrade by the autumn.”
The downgrade speculation came just days before the first round of French national elections. Socialist candidate François Hollande, who is challenging President Nicolas Sarkozy, added to the confusion by claiming Moody’s planned to make the downgrade after the second round of elections.
Moody’s denied making any such plans.
The G20 Finance Ministers meeting in Mexico City agreed that they want proposals to curb the influence of rating agencies.
The ministers put a deadline of November on the project to look for ways to reduce the influence rating agencies have on investment decisions. The task was assigned to the Financial Stability Board (FSB), the group that recommends changes to the global financial system.
Russian Finance Minister Anton Siluanov explained to Reuters, “It was suggested, that the objectivity of rating agencies should be definitely controlled.”
The G20 Ministers’ statement says, “We have tasked the FSB to coordinate, with the IMF and World Bank, a study to identify the extent to which the agreed regulatory reforms may have unintended consequences for EMDEs [emerging markets and developing economies].”
Guido Westerwelle, German Foreign Minister, also urged the creation of an independent European rating agency. Reuters quotes him as saying, “It is time for Europe to prove capable of facing up to the credit ratings agencies.”
Writing for the Sydney Morning Herald, Ian Verrender first accuses the big three rating agencies of “having missed every major financial crisis or corporate collapse in the past 20 years.” He then confronts them for “jumping at shadows” when Fitch downgraded three of Australia’s four largest banks for having “suddenly discovered Australian banks have borrowed heavily overseas and, apparently, there has been some kind of financial trouble in Europe.”
Mr. Verrender then continues to complain, “That bizarre announcement was followed yesterday by an even more laughable proposition from Standard & Poor’s. It breathlessly announced that Australia’s banks could well be at risk if China’s economy collapses. But if China’s economy has a ”hard landing”, as the agency postulated, there’s certain to be more than just our banks that will suffer. Try our resource companies for starters. Try the global economy for seconds.”
He writes that Australia’s Reserve Bank governor Glenn Stevens is also at a loss to understand the downgrades. He told the Senate that other Australian companies have a far greater risk profile but are rated higher than the banks. Likewise, Mr. Verrender points out that the banks were at far greater risk three years ago when the federal government covered their debt and insured their deposits.
He concludes that the problem facing the banks is the demand for loans has shrunk “alarmingly.” By downgrading the banks and making it more expensive for them to borrow (and lend), it exerts even more downward pressure on loan demand.
The difficult position that the rating agencies find themselves with regard to the European Union (EU) grew worse when Standard & Poor’s (S&P) inadvertently sent a message suggesting in which France’s AAA bond rating with a stable outlook had been downgraded.
A spokesperson for S&P emphatically stressed that the message was a technical error and cited the fact that France’s AAA rating on the agency’s web site was never changed. The error did cause French bond yields to rise slightly higher.
CNN quoted the blistering comments by European Commissioner Michel Barnier: “This incident is serious and it shows that in the current tense and volatile market situation, market players must exercise discipline and demonstrate a special sense of responsibility.”
The EU is already considering regulation to increase transparency and oversight for how rating agencies evaluate sovereign debt. The agencies strongly oppose these changes; however this snafu is likely to make regulators’ positions still more difficult.
RBS, Wells Fargo and Bank of America are no longer using Standard & Poor’s to rate their mortgage-backed securities. The core of the dispute is how Standard & Poor’s has chosen to respond to Section 933 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The section holds agencies liable for losses if investors can prove that ratings were not based on reasonable assessments of underlying data.
Whereas all of the leading rating agencies – Moody’s Investor Services, Standard & Poor’s and Fitch Ratings – have sought indemnification in deal documents, Fitch and Moody’s have apparently been flexible while Standard & Poor’s has not.
Standard & Poor’s has gone so far as to claim the right to sue a bank if the agency’s ratings were based on incomplete or inaccurate information about a deal that the bank provided. ABAlert.com quotes a Standard & Poor’s insider as claiming, “We hold them liable for the accuracy of their information…That’s what they really don’t like.”
Standard & Poor’s is now working with the Securities Industry and Financial Markets Association to resolve their conflict with the banks.
Hong Kong’s Securities and Futures Commission (SFC) has proposed new licensing and supervision of credit rating agencies. The stated goals, as quoted by Maureen Whalen when writing for Lexology, are to “mandate minimum conduct standards for CRAs, including requirements that credit rating activities be conducted in accordance with principals [sic] of integrity, transparency, responsibility and good governance” and “ensure that ratings prepared in Hong Kong continue to be serviceable in other jurisdictions, including for regulatory purposes.”
The proposed legislation would necessitate minimum capital requirements for all credit rating services activity, and credit rating agencies would be required to separate their credit rating business from other types of business.
The new rules are planned to be implemented by the end of January 2011. Comments on the proposal are due by August 20, 2010.
FOX Business has joined many European business analysts in wondering whether the U.S. deserves the AAA rating it has maintained since 1917. In light of how other advanced nations’ sovereign debt is being aggressively scrutinized and downgraded, there are those who feel the U.S.’s AAA rating is unwarranted.
FOX believes that the interest cost of the U.S. debt as a percentage of total federal tax revenues is the greatest concern for credit rating agencies. The U.S. needs to keep the interest cost to federal tax revenue ratio stable. This is why there is pressure to raise federal taxes to avoid a credit rating downgrade.
Moody’s says that the United States debt is currently affordable. After peaking at 10% two years ago, the ratio of interest payments to federal revenue has dropped to 8.7% in 2010.
Filed under: The Rating Agencies, The Ratings System, Uncategorized
The European Union (EU) regulators envision two ways to handle ratings from agencies that come from non-member states. The first is to accept ratings of countries that they believe are “equivalent,” such as Japan.
The second way to is to accept ratings from other countries so long as their process is as “stringent” as in the EU and an EU agency has endorsed the assessments.
If the latter is imposed in a strict sense, it could affect both borrowers and lenders from other countries looking to engage Europeans institutions. Banks in particular could have a hard time holding non-EU assets as regulated capital under the new law.
The Financial Times quotes a worried diplomat as saying, “European banks could be shut out of certain capital markets…it’s not a small issue.” The United Kingdom and the Netherlands among other Nordic states are urging a loose interpretation of the regulation whereas France and Italy are pushing for a strict application.
Finance ministers from the European Union (EU) are considering penalties for ratings agencies that assess members’ sovereign debt inappropriately harshly.
Didier Reynders, Belgium’s finance minister, said, “It must be possible to penalize, if after some weeks or months it is possible to say it [a downgrade] was a wrong signal, what is the responsibility of the rating agency? It is quite difficult to say that there is no responsibility if it is possible to prove it was a wrong analysis, a wrong signal. The penalties are the capacity to impose some responsibility on the rating agencies.”
There is an increasing level of frustration with the rating agencies among the EU nations. The general feeling is that ratings agencies are outside the area of reasonable responsibility and their opinions do not encompass all the factors that help to mitigate sovereign debt risk. Yet a seemingly arbitrary downgrade can have devastating effects on nations’ cost to borrow and consequently their national budgets.
How to determine whether agency rating was “wrong” and the appropriate penalties are still open questions.