Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

S&P Attempts to Fix Broken Process


Problem has roots in conflict of interest.


Standard and Poor's proposed actions to increase transparency in its ratings process erases any lingering doubt that ratings agencies failed in their charge to impartially evaluate the merits of debt offerings.

The WSJ reports that the subsidiary of the McGraw Hill Company (MHP) released a list of 27 changes to its rating procedures to try and identify potential conflicts of interest. The changes come only days after rival Moody's (MCO) announced plans to overhaul its ratings methodology for structured finance and other products that may not behave like municipal or corporate debt.

S&P's proposed operational changes raise all sorts of red flags for a process the entire credit market is reliant upon to assess risk:

  • Lead analysts will be rotated between issuers every five years to prevent personal relationships from effecting ratings.
  • Analysts who leave the company to join issuers will have recent deals reviewed to ensure objectivity.
  • Risk Management staff will receive more training.
  • Analytic tools will be added to track structured-finance performance.
  • An "obudsman" will be brought on to identify potential conflicts of interest.
  • An auditing expert will be brought in publicly to review the process.

So, it looks like S&P had untrained analysts rating deals the performance of which they neglected to monitor. Lead analysts gave out favorable ratings to longtime friends, who in exchange offered them lucrative positions to jump ship. No one oversaw the process, but why bother since it wasn't audited in the first place.

S&P has accurately identified the root of its ratings problems as one of a conflict of interest. However, as stated after the release Moody's similarly weak attempt to address the credibility of credit ratings:

As long as ratings agencies are paid by the issuers of securities rather than investors, they will be financially motivated to hand out generous ratings. No amount of new labeling, fancy packaging or legal ruses can disguise the fact that in the for-profit business of rating debt, business is awarded to the firm that provides the best ratings.
< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opin= =3D =3D3D ion about the performance of securities and financial markets by = the wr=3D iter=3D3D s whose articles appear on the site. The views expresse= d by the wri=3D ters are=3D3D not necessarily the views of Minyanville Medi= a, Inc. or members=3D of its man=3D3D agement. Nothing contained on the web= site is intended to con=3D stitute a recom=3D3D mendation or advice address= ed to an individual investor =3D or category of inve=3D3D stors to purchase= , sell or hold any security, or to =3D take any action with re=3D3D spect t= o the prospective movement of the securit=3D ies markets or to solicit t=3D= 3D he purchase or sale of any security. Any inv=3D estment decisions must b= e made =3D3D by the reader either individually or in =3D consultation with = his or her invest=3D3D ment professional. Minyanville write=3D rs and staff= may trade or hold position=3D3D s in securities that are discuss=3D ed in = articles appearing on the website. Wr=3D3D iters of articles are requir=3D = ed to disclose whether they have a position in =3D3D any stock or fund disc= us=3D sed in an article, but are not permitted to disclos=3D3D e the size o= r direct=3D ion of the position. Nothing on this website is intende=3D3D d = to solicit bus=3D iness of any kind for a writer's business or fund. Mi= ny=3D3D anville mana=3D gement and staff as well as contributing writers wi= ll not respo=3D3D nd to em=3D ails or other communications requesting inves= tment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos