“The western ratings agencies are politicized and highly ideological and they do not adhere to objective standards,” Guan Jianzhong, told the Financial Times yesterday.
Absolutely true, of course. Standard & Poor’s, Moody’s, and Fitch Ratings, the big three U.S. credit rating companies, failed miserably during the run up to the financial crisis, giving AAA-ratings to packages of securitized debt that went belly up in short order. And there’s good reason to believe that the companies aren’t downgrading the sovereign debt of countries such as the United Kingdom and the United States now for political reasons.
But Guan Jianzhong’s comments reveal the real problem of finding a solution to the problem. He’s the head of Dagong Global Credit Rating, the largest credit rating agency in China. If he’s afraid that Chinese investors and China’s sovereign wealth funds aren’t getting good information from Western credit rating companies on Western debt, investors have just as much reason to worry about politicized, high ideological credit quality opinions coming out of Dagong Global Credit.
Certainly the sovereign debt ratings Dagong Global Credit issued yesterday did nothing to assuage that worry. China ranks above the United States, the United Kingdom, Japan, and France, according to Dagong Global Credit. Given what little we know of the huge bad loans at China’s state-controlled banks and the $1.7 trillion in loans backed by local governments that kind of blanket endorsement of China’s credit quality seems, well, political and ideological.
Dagong Global Credit is a private company founded in 1994 with about 25% of the Chinese market for credit rating. Most of the rest of that market belongs to S&P, Moody’s, and Fitch. It doesn’t make Dagong Global Credit’s criticism less valid to say that the company would love to see investors and institutions move some of the market share now owned by S&P, Moody’s and Fitch in its direction. But criticizing those companies for bias does indeed help Dagong’s business prospects.
I’m not sure that I’d trust Dagong Global Credit on sovereign debt ratings any more than I would S&P, Moody’s, and Fitch. But I’m not sure if I’d trust any company to issue ratings that weren’t politicized or highly ideological.
A pox on all their houses, I say. Let them all compete. Let more companies into the business in the United States. Let them issue conflicting ratings. And let investors figure it out. Better than the blind trust in ratings that let Wall Street sell so many truly terrible products in the run up to the financial crisis.
WHERE ARE THE PERP WALKS FOR THESE THIEVES? I guess that our congress is afraid that they too will be implicated for their own part in our financial meltdown.
Ruters and South,
I agree with both of you with one small caveat, the Street/Lenders really worked backwards. Meaning, once we get that AAA, the world is our oyster. Now you could argue that the agencies put hurdles in place to call an asset AAA rated and then, after this crap “fit” the model, they should have changed the hurdles, but that rarely happens. Sorry for being esoteric and a little Inside Baseball, but these distinctions might be important to some.
Annuities (as people chase yield and safety) will be “the next big thing” and Wall Street is right now working backwards to provide the illusion of a proper amount of safety to purchasers.
Ruters, I agree with you 100 percent. My only point was the fund managers get paid a ton of dough to exercise discipline and discretion and they exercised neither. And now all we hear is it’s the rating agencies’ fault. Please.
Southof8,
I both agree and disagree with you. It’s not that pension funds and others buy the debt because its AAA rated, its that they wouldn’t have bought if it were BB (like most of these CDO/MBS tranches should have been). Thus the ratings agencies gave these institutions tacit approval to conduct major purchases that otherwise may not have allowed such a large market proliferation and subsequent credit squeeze.
But I agree that buyer beware and you should always do your own research and not just rely on an analyst or rating agency
Well if we can’t use the rating agencies then maybe we can use analyst ratings…hahahahahaha!
And kowloon dave, I don’t know any Americans that are in denial about what a crappy job the rating agencies have done or what a crappy job the government has done, etc., etc., etc…but I have met a fair number of Chinese who can’t admit their country/government is anything other then perfect.
phillip e,
$12.63 is my target price on CBEH for now.
Ed,
Thanks for the heads up on CBEH.
Just being curious, whats your stop-loss and expected top out price?
Thanks
Phil
I disagree that the ratings agenies caused or are responsible for the credit meltdown. They are sheep. Anyone who buys ge (or usb or gs or any other stock) because it has a credit rating of x is an idiot (and I don’t think there are many idiots investing in stocks. Greedy or foolish perhaps…). Too many institutional investers have been reaching for yield in a low interest rate environment the last few years, and using the cover of a aaa rating. Shame on them. To think they could get the safety of a us treasury at 200 basis points over treasury rates was brazen greed.
Excellent article, Jim. Unfortunately too many people have conflicts of interests in important decision making that they shouldn’t have. I am retired but do some consulting and each time have to sign a statement regarding no financial or personal involvement with any decisions I make, d or vote on re insurance or physicians and their competence etc. It is not ideal but makes you aware each time of your responsibilities to the public. It would be easy for the boards of these companies to do and would be a start in the right direction—always liars though!!
right, competition will always improve the product and that’s what’s most important.
but I think it’s such a waste opinion leaders of that importance fight on ideologies and political perceptions rather than on cold facts and issues.
and that’s a question of concern to me since if they lure themselves, their conclusions are worthless from a course of action to pick perspective.
JF
Back to the subject of “Rating Agencies and (in) correct nformation”…..
“You get what you pay for”. Nice ORENV! I think my mom told me that when I was 6. In fairness, I was a Subprime lender for 20 years, so I had a small (he laughs) inkling those “ratings” weren’t worth the paper they were written on a LOOOOOONG time ago. Lastly, if any of us see a service that they think others can profit from (see: Jubak, Jim), they are more than welcome to start a business selling such services.
Actually there is tons of information that is free and of great value. Jim’s blog is a great example. You just have to know what isn’t good to rely on.
You get what you pay for, so there is no surprise that the information (free to us) has no value. One would think that those who “rely” on it, would know better. So let them continue, just ignore the results. Maybe someday the folks paying for this will realize that nobody cares what the reports say and will stop paying. Sounds like a really good business opportunity to sell research services……
On the subject of China…
I am adding China Integrated Energy (CBEH) to my limit buy orders (at $8). I don’t know the future of biodiesel, but this company has clearly shown it can be profitable.
I must respectfully disagree, twoyrfixed. We, the investing public, simply do not have access to such details as debt maturity profiles, which are required to know how a company’s debt is structured, at what rates and maturities. For a large company with substantial free cash flow, this is not so much an issue, but for smaller companies, they could be near default in a tight credit environment like today, and we would not have a clue.
Yea, let’s have some more regulation. Sure, in a perfect world, it would be great to base investing decisions on unbiased info, whether it comes from Fitch, CNBC or Buffett.
However, that’s not the way it works Comrades.
May I suggest we use our own intellect to determine the quality of information from any source we choose to use? If you’re “following” Mr. Jubak, don’t you already do so?
Just as a general note. If the credit agencies are already politically and idealistically have basis, just imagine what they would be if the government controlled them.
livetoride:
Great Idea of yours to have a regulated public agency monitoring and providing non-biased reporting. Do you REALLY think the Republicans (Tea Party, especially) would allow the Obama organization to take that on, TOO? I totally agree with you about the conflict of interest now part of the existing system. Caveat emptor.
The way I see it the problem with not being able to trust the credit rating agencies isn’t as much for the individual investor (at least for their buying of non-fund securities) as for large firms/funds which have to buy so much that there is no way they can look at every individual security. They just buy packages of what are suppose to be at a certain level, and when that is completely wrong we get the problems we just ran through.
Based on this alone I say that the “financial reform” bill that just past isn’t going to do anything from stopping the problems of the past from being problems of the future.
We, the investing public NEED credit rating agencies. Their services are critical to understanding a balance sheet. The question is how to structure their business model so that they serve us, and not the credit issuers or their own shareholders, like Buffett. Does anyone know of any current congressional or regulatory action on this issue?
From yesterday… DON’T USE OUR RATINGS!
http://www.zerohedge.com/article/did-credit-agencies-just-go-extinct
I mean people might rely on them and sue us when they sour. Guess that means that they weren’t too concerned about repurcussions before the “finance reform” bill.
Deanhk: Unfortunately, you have it backwards. If any of the rating agencies did an honest job they’d be out of business. It’s a pay-to-play system. The issuers pay for the credit rating not the investors…so they just shop their debt around until they get a rating they like. And that’s the problem, the investors should be paying for the guidance not the issuers. Of course, the reason it’s not like this is because our stupid federal government got involved and via unintended consequences changed the whole system for the worse.
BTW, I do think S&P or Moodys’ rating on US is fishy. I remember one bond guru said recently, do your own diligent.
Chinese may have their own rating agencies, but what matter is whom the investors trust. If investors do not trust the agency’s rating, it’s useless. However, China is the biggest investor these day. Then the question is, will the Chinese (such as S.A.F.E.) trust their own rating agency or S&P and Moodys?
Jim, I’m happy to see you tell it like it is, to not try to sugarcoat or hide the horrendous fault that Wall Street & the rating agencies bear for the damage caused to investors and financial systems around the world. The rest of the world knows this already. It’s time for us Americans to get out of denial & to face the ugly truth. I still harbor some hope that the American legal system, which is supposed to provide redress for negligence & fraud, will still hold the ratings agencies & investment banks liable for the horrendous damages that they caused. The only drawback is that the laws & regulations have been written by politicians & regulators beholden to Wall Street.
I’ve read, Jim, that the central issue is conflict-of-interest, that is, it is the companies themselves who pay the fees for their ratings. A solution that has been offered is to make them regulated public utilities, performing a vital public service, and guaranteed a reasonable rate-of-return. Haven’t heard much discussion of that, though.
If just one of these companies would do an honest job, they would soon have all the business and loud howls from DC.