Views on improving the integrity of global capital markets
01 August 2011

CFA Charterholders to Credit Rating Firms: Vote of No Confidence

Posted In: Uncategorized

As it became clear last week that the U.S. fiscal crisis was reaching a boiling point in Washington, we issued a brief survey to the CFA Institute global membership. We wanted to find out more about how our members viewed prospects for the U.S. government debt markets, as well as their perspectives on the performance of a major player in the ongoing debt-ceiling debate: credit rating agencies. Over 5,000 members responded to the survey, with about 1,000 of those respondents sharing additional comments.
Comments received on credit rating agencies were fairly uniform. Most believe that the rating agencies aren’t taken very seriously in the marketplace given their poor performance in rating structured mortgage products in the lead-up to the financial crisis. And most felt that the agencies tended to act too late, when the markets had already digested the relevant news. Only one-third felt that CRAs are doing an appropriate job in terms of rating sovereign debt. Despite the feeling that CRAs are not taken seriously, nearly two-thirds felt that a credit downgrade of U.S. debt from AAA to AA rating would have at least a moderate impact, sending bond prices down and interest rates higher.
Now that a budget deal is in sight, the question turns to whether the agreement demonstrates enough progress in reducing U.S. deficit spending to avoid a downgrade. Whether the U.S. has gotten its fiscal policy turned in the right direction will be debated for many months in the lead-up to the 2012 presidential and congressional elections.
Another question sure to linger is whether rating agencies are still relevant and necessary in the global capital markets. Indeed, a significant percentage of survey respondents were concerned the U.S.-based CRA firms were biased in their ratings of U.S. governments, which calls into question whether the rating agencies will (or should) be removed or replaced in the process of evaluating sovereign debt. 

What do you think? Where do we go from here? Please comment below.

About the Author(s)
Bob Dannhauser, CFA

Bob Dannhauser, CFA, is head of global private wealth management at CFA Institute.

8 thoughts on “CFA Charterholders to Credit Rating Firms: Vote of No Confidence”

  1. fundexchange says:

    Never found any value in anything sent to me by any agencies, and certainly having been on the receiving end of their “due diligence” when I ran fund management companies in year gone by – none of their analysts ever asked any of the right questions that actually addressed any of the real risks in the portfolios. But if you are say a trustee on a public pension or endowment fund with some fiduciary liability, how else do you “c.y.a.” ? blame the rating agencies

  2. Hodja says:

    Besides being late of detecting mortgage crisis of 2008, actions of CRA seen very suspicious and biased towards European countries and maybe politically motivated (same could be said regarding USA). The feeling is that they are interested in sinking of those countries in trouble. Whenever Europe come to some kind of solution immediately CRAs come up with another downgrade after which crisis become even worse and doing bad favour for those who already invested in that market. Without them there would not be at least panic which would drive cost of funding for those countries. All in all they themselves are another factor of instability. Too much depend on their opinion.

  3. Jeffrey Z. says:

    My recent research shows that both ratings credit watch (CW) and ratings outlook (OL) are associated with the significant and pretty large abnormal negative stock returns, which suggests that the stock market does think the ratings matter.

  4. Strangehaze says:

    When has Washington’s political drivel ever affected the minds of intelligent investors? Would people really rather hold AAA Indonesian bonds than U.S. double AA bonds had we gone through a “selective default” according to S&P and Moody’s? CRA’s today are just a bunch of kids trying to flex their muscle to prove that they can hang with the big boys post the MBS/CDO era.

  5. JR says:

    This is a bad deal. It kicks the can past the 2012 presidential election. The mandatory spending cuts don’t kick in until after the 2012 presidential election. Democrats whine that spending cuts hurt the struggling economy. They are utterly oblivious to the enormous damage caused by Washington gobbling up $150 billion of what would have been capital invested in the private sector every month. Washington’s insane affordable housing policies caused the recession, and Washington is now a huge deadweight drag on the recovery with borrowing and wasteful spending. This Congress is so dysfunctional that it could not pass a bill to terminate the ethanol madness. Where are the Bond Vigilantes? In 1994 the Bond Vigilantes ran long treasury rates from 6% to 8% and put President Clinton’s spending agenda on ice. In November spendthrift Democrats lost control of both the House and the Senate. Unfortunately, tax parasites now outvote taxpayers. This will implode our democracy into a welfare state death spiral.

  6. Sixx says:

    Does anyone know anything about Canadian Tire? Well, they are a automotive & sports goods store in Canada that prints it’s own ‘funny money’ and gives these bills to customers (after they buy something of course) in additon to the usual dollar denominated change. This CT ‘currency’ can be used to buy stuff at Canadian Tire. Now, if CT had any debt and all of this debt happened to be denominated solely in this CT ‘funny money’ then CT would have the infinite ability to repay it’s own debt… because it can simply create more bills to pay those obligations. Follow? Ok, so in the scenario just illustrated switch out Canadian Tire and bring in the USA. The USA has the infinate ability to pay any debt denominated in the currency it can create at will. So, If ratings agencies are evaluating the INABILITY of the USA to pay off debt (or ‘meet its obligations’) denominated in the currency it can produce, then yes, the ratings agencies are truly incompetent and should not be relied upon for any investment decision.

  7. Hodja says:

    See, now is Italy’s turn. Seems like someone want markets to go down by spreading contagion – and their plan is almost working. Whenever government is close to solve (more or less effectively) for Greece, then come attack on Ireland, after helping Ireland then Portugal, Spain and Italy. Who next, France? Yes, there are some problems in those countries which should be addressed, but why they did not notice this problem growing long time ago when they should do? Noticed at that time this would not be as dramatic! Doing that at the fashion they are doing looks very nasty. Also why they do that for many countries at the SAME TIME? To make things worse? It looks as this is concerted attack to send markets down and who knows for what reason (political; buy at cheaper price or maybe they are already shorting market), but only harder push is needed. As in 2008 crisis there were also people who earned billions by shorting on the back of CRA assurance of MBA’s quality. There should be new system devised which will be timely and objective.

  8. Bob Dannhauser, CFA says:

    So some apparently see no reason for there to be an ongoing role for credit ratings agencies (either for sovereigns, or even more generally for any debt) – and others hope for a reconstituted system that has the “timely and objective” qualities such as suggested by @Hodja. For those of you in the latter camp, what are the alternative models that you think hold promise? User-pays model? Government-sponsored ratings? Issuer-pay model with more complete disclosure? Or something else altogether?

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