ANZ Hit’s Out At Ratings Agencies

Post by Sharat on December 24, 2008 · Under Business News, Featured Articles, banking · Comment 

International credit ratings agencies are facing fresh criticism and increasing threats as corporations fund managers and investors increasingly believe that the credibility of their ratings have been destroyed in the wake of the credit crisis which to some degree has affected every corner of the globe.

Last week at its Annual General Meeting the board of ANZ launched a scathing attack on the ratings agencies. ANZ chairman Charles Goode said that ANZ was overly reliant on the ratings given to US debt products, which has forced the lender to take a US$ 530 million earnings hit.

“A few years ago, we relied on them far too much. The ratings agencies have been found wanting and we have been found wanting for relying on them.” Mr. Goode said.

Mr. Goode’s comments were echoed by ANZ chief executive Mike Smith, who said the approach used by the credit ratings agencies of rating corporate debt and debt products using the same structure is flawed. “The ratings that were assigned to debt instruments were the same assigned to corporates and companies, In retrospect, for debt it should have a different rating. A lot has to happen and the whole world was too reliant on these agencies” Mr. Smith said.

ANZ insured the corporate default swaps of US corporates. The bank believes it can recoup part of its failed CDS investment as the mark-to-market valuation becomes more stable.

Though ratings agencies should be blamed for a lot of the financial chicanery that occurred throughout most of this decade, it is hard for sophisticated investors and lenders such as banks to argue that they relied on those ratings exclusively when making investments.

Argument Does Not Wash

The argument that banks were unaware of the technique of credit enhancement or did not know where the additional yield they were receiving on investment grade securities and their derivatives were coming from is suspect at best.

If anything, the credit ratings agencies enabled sophisticated investors and banks to take speculative positions on the US property market, investing in securities and picking up the yield on investments they otherwise would have never been allowed to touch with a barge pole by their principals or shareholders.

That banks and investors were naïve or innocent and not complicit is difficult to swallow. Fixed income derivatives CDS’s and their like are only available to the most sophisticated and most if not all would have been well aware of the use of credit enhancement to market non investment grade securities to an audience whose mandate would ordinarily not accept such risk.

Standard & Poor’s Australia managing director John Bailey, who refused to speak directly to the media choosing only to provide written answers to his own questions, admitted some confidence had been knocked out of ratings given by global agencies.

Mr. Bailey said that domestically the five-year default rate of locally issued corporate debt rated investment grade was just 0.6 per cent. “Rating agencies have periodically been criticised for being too slow or too quick or too aggressive or too cautious. This is inevitable when you are in the business of providing opinions about future events. We have seen widespread volatility in the market value of many structured securities and around 40 per cent of our ratings on US housing-related securities have been downgraded, reflecting our view of their changed creditworthiness.” Mr. Bailey said.

The agencies created conflict last week when the two majors, S&P and Moody’s, downgraded Rio Tinto on debt concerns. Fund managers believe the system is flawed and little weighting is now given to ratings after the emergence of the financial crisis

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