interest rate

credit Rating Agencies – Need for Reform

Credit rating agencies (ACC) – Need for Reform

1. Crisis – The lights in the ACC

"Credit rating agencies use their control of information to fool investors into believing that a pig is a cow and a rotten egg is a chicken barbecue. Collusion and misrepresentation are not elements of a true free market "- U.S. Congressman Gary Ackerman

The proper functioning of global financial markets depends in part on reliable assessments of investment risks, the ACC and play an important role in promoting investor confidence in those markets.

The earlier rhetoric despite tough invites us to focus our lens on the functioning of credit rating agencies. recent debacles such as outlined below make it even more important to consider the representation of the ACC just as advisers.

i) Sub-Prime Crisis: In the recent subprime crisis, the ACC has been under increasing fire for their complicity disguised junk CDO favorable rating in the business of subprime mortgages, a crisis that is having repercussions around the world. To give some background, loan originators were guilty of sub-prime mortgages and securitisations packaging, and marketing as collateralized debt obligations in the secondary mortgage market. CRA failed in their duty to warn the world of finance this bad practice through an assessment fair and transparent. Surprisingly, gave favorable ratings to the CDOs, for reasons that should be examined.

ii) Enron and WorldCom: These companies were rated investment grade by Moody's and Standard & Poor three days before it filed for bankruptcy. CRA were alleged to have favorable rating product risk, and in some cases risk to these products, along with a fat fee.

There may be other highly valued by the Enron and WorldComs waiting to go bankrupt. CRA needs to be reformed so that they can pinpoint cancer, either in forward mode to increase safety in the financial markets.

2. Ratings and CRAs

i) Credit rating: a structured methodology to classify the creditworthiness of generally an entity, or a compromise of credit ( example, a product), or a debt or debt instrument similar to a transmitter as well as an obligation.
ii) Credit Rating Agency (CRA) is an institution specializing in the work of the previous rating. Ratings by ACC are not recommendations to buy or sell any security, but only one indicator.

Ratings can be divided into more
i) Classification requested: where the rating is based on a request that a bank or company and also participates in the rating process.
ii) unsolicited Rating: when the rating agencies claim to vote on a public interest organization.

ACC help to achieve economies of scale that help prevent domestic investment in tools and credit analysis. Thus, allowing intermediaries market and end-investors to focus on their core competencies leaving the job reliably complex number specialized agencies.

3. CRA of the note

Agencies that assign credit ratings to companies include

AM Best (U.S.)
Baycorp Advantage (Australia)
Dominion Bond Rating Service (Canada)
Fitch Ratings (U.S.)
Moody's (USA)
Standard & Poor's (U.S.)
Pacific Credit Rating (Peru)

4. CRA – Power and influence

Several participants in the market that use and / or are affected by grades as follows

a) Issuers: A good credit rating improves the liquidity of the issuers and also the prices which in turn meets the investors, lenders or counterparties other stakeholders.
b) Buy-Side Firms: Buy side firms such as mutual funds, pension funds and insurance companies use credit scores as one of several important inputs to their own internal credit assessments and investment analysis that helps them identify price discrepancies, the risk of security, compliance requiring them to park funds in investment grade assets etc. Many restrict their funds to higher grades which makes more attractive for investors with risk aversion.
c) The retail businesses: Like the purchasing companies that sell a lot of business enterprises side as broker-dealers to use the skills to manage risks and effects of trade.
d) Regulators: Regulators use credit ratings mandate in various forms, for example, the Basel Committee on banking supervision allowed banks to use external credit ratings to determine the allocation capital. Or to cite another example, restrictions are placed on the public administration or public pension funds of employees for local or national governments.
e) Taxpayers and Investors: credit depending on the direction of change in value, rating changes can benefit or harm investors in securities through the erosion of value and it also affects taxpayers through the cost of government debt.
f) Private contracts: Ratings have been able to affect significantly the balance of power between the contracting parties that the classification is inadvertently applied to the organization as a whole and not just their debts.

Rating downgrade – A death spiral:

A downgrade can be a vicious circle. Let's visualize this in steps. First place a rating cut happens. Banks now want to anticipate the full repayment bankruptcy. Company may not be able to pay that leads to a reduction rating additional. This starts a death spiral that led to the collapse of the info "and the final closing.
Enron faced this spiral in which stipulate a repayment clause total loan in the event of a further downgrade. When downgrade took place, the clause added to the financial problems of Enron pushing in financial trouble deep.
Pacific Gas and Electric Company is another case in point which was pressed by the aggrieved counterparties and lenders demanding the return by a rebate rating. PG & E has been unable to raise funds to pay its short-term obligations, exacerbating the fall in the death spiral.

5. ACC as victims

Face the following challenges ACC

a) Insufficient information: One of the complaints that have the ACC is their inability to access accurate and reliable information from issuers. CRA mourn that issuers deliberately withholding information is not in the public domain, for example, contingencies Undisclosed which may adversely affect the liquidity of the issuers.

b) System of compensation: ACC act on behalf of investors, but are in most cases paid by the issuers. There is a potential conflict of interest. As the rating agencies are paid by those who qualify and not by the investor, the market view is that they are under pressure to give their clients a favorable rating – otherwise the client will move to another agency to bind. CRA are affected by conflicts of interest that could prevent them from providing accurate and honest assessments. There are noises in conflict with some CRAs admit that if they depend on investors of compensation, which would be out of business. Others strongly deny conflict of interest that the defense of the fees received from individual issuers are a percentage very little of their total income, so that no single issuer has any material influence with the rating agencies.

c) The allegations of pressure market: the ratings are the convenience and not based on logic and resort to unfair practices due to the inherent conflict of interest is discarded the ACC as malicious because the business is the reputation rating based on ratings and wrong can reduce the agency's position in the market. A few words reputational concerns are sufficient to ensure that the exercise appropriate levels of care in the rating process.

d) the qualifications of more stress: Allegations floating CRA actively promote an overemphasis of their skills and encouraging businesses to make like-wise. ACC against saying that ratings are used out of context through no fault of their own. They apply to organizations per se and not only the debts of the organizations. A favorable credit rating, unfortunately used by companies such as seals of approval for product marketing purposes unrelated. A user must be aware that the rating is provided against the field stricter application of the investment being evaluated.

6. ACC as authors

a) arbitrary adjustments, without accountability or Transparency: CRA can reduce and improve and we might cite the lack of information from the nominal, or product as a possible defense. No clear reasons for lowering negative affect the issuer, the market could mean that the agency is aware of certain information that is not in the public domain. This can cause safety issuers volatile due to speculation.
Sometimes eextraneous considerations determine when an adjustment would occur. no credit rating agencies downgrade companies when they should. For example, many Enron remained at investment grade four days before the company declared bankruptcy, Although credit rating agencies had been aware of the problems of the company for several months.

b) Due diligence is not done: There are some contradictions evident that the ACC are reluctant to resolve because of conflicts of interest as mentioned above. For example, if we focus on skills Moody's we find the following inconsistencies.

The previous three have the same capital allocation forcing banks to move toward riskier investments.

c) intimate ACC to management: The business logic is required to develop close ties with the corporate governance who are valued and allowing this relationship affects the rating process. Was found to act as advisors to business activities undergraduate and suggesting measures which could have beneficial effects on the classification of the info. Exactly at the other extreme are the agencies that are accused of unilaterally adaptation the ratings while denying a company an opportunity to explain their actions.

e) The creation of strong entry barriers: Agencies are sometimes accused of being oligopolists, because barriers to entry are high and rating agency is itself based on reputation (and the financial industry pays little attention to a classification that is not widely recognized). All profit agencies consistently high (Moody's, for example, is greater than 50% gross margin), which indicate monopoly prices.

f) Promoting ancillary companies: ACC have developed ancillary businesses such as pre-degree assessment consulting and corporate services to complement their core business valuations. Issuers may be forced to buy the ancillary service rather than a grade favorable. To make matters worse, Moody's excluding all other CRAs are private property and its financial results do not separate the income of their subsidiary companies.

7. Some Recommendations

a) Public Information: The extent and quality of disclosures in the financial statements and balances must be improved. More importantly the discussion and analysis of management should require disclosure of off-balance sheet arrangements, contractual obligations and contingent liabilities and commitments. Reducing the time between the final quarter of the issuer or the fiscal year and the date of filing the quarterly report or annual ACC will allow for early information. These measures will improve the ability of ACC to issuers of tax. If CRA concluded that the important information available, or an issuer is less than the next, the agency may lower a grade, refuse to issue a rating or even withdraw a rating existing.

b) due diligence and competence of analysts ACC: Analysts do not rely solely on the words of management, but also perform their own due diligence, monitor several public documents, probing opaque disclosures, review of proxy statements, etc. There needs to be rated stricter (or more) to be an employee of the credit rating agency.

c) Removal of Barriers to Entry: Increased number of players can not completely reduce the powers of an oligopoly of a few, but deeply rooted in the best would be on alert to keep submitting to a certain level of competition and allow market forces to determine the rating reflects the financial market really better.

d) Cost Rating: As far as possible, the rating costs needs to be published. If disclosure of confidential information, raises the question of business confidence, then the agencies must at least be the subject of intense financial regulation. Analyst compensation should be based on merit based on the proven accuracy of their qualifications and not on issuer fees.

e) Transparent Process Evaluation: Agencies must make public the basis for their qualifications, including statistics of measurement historical performance and lowers default rates. This will protect investors and improve the reliability of credit ratings. Regulators should require to ACC to disclose its procedures and methodologies for assigning ratings. Rating agencies should conduct an internal audit of their methodologies rating.

f) be independent subsidiary companies: Although the accessories business is a small part of total revenue, the ACC still need establish comprehensive policies and procedures for firewall scores complementary businesses. independent staff and analysts classification should be used for the marketing of ancillary businesses.

g) Risk Disclosure: The rating agencies should disclose material risks to discover during the risk rating process or any other contingency which appears not to be adequately addressed in public information, the regulatory authority for further action. CRA must be more proactive and conduct formal audits of issuer information to find the fraud not only restrict their role to evaluate the creditworthiness of issuers. Rating triggers (eg, total loan repayment in the event of a downgrade) should be discouraged wherever possible and must be disclosed when there.

These measures can be improved by implementing market confidence in the CRA, and grades can become a key tool to boost confidence investor by improving the safety of financial markets in the broadest sense.

Resource List

i) http://www.zyen.com/Knowledge/Articles/assessing_credit_rating_agencies.htm
ii) http://www.chasecooper.com/News-Regulatory-Basel-II-2007-10-01.php
iii) http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0491.2005.00284.x?cookieSet=1&journalCode=gove
iv) http://www.house.gov/apps/list/speech/ny05_ackerman/WGS_092707.html
v) http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2373869.ece
vi) http://www.cfo.com/article.cfm/9861731/c_9866478?f=home_todayinfinance
vii) http://en.wikipedia.org/wiki/Credit_rating_agency

Fuss Says Global interest rates Will Begin Rise in 2011: Video

MORTGAGE BROKER ~Novelty Sign parking bank loan gift $8.99 BRAND NEW SIGN!! 12″ tall and 8″ wide sign. Our novelty signs are made from outdoor durable plastic with professional grade vinyl graphics. These signs will never rust or fade, perfect inside or out (4-5 years outdoors)! The sign has round corners and a hole pre-drilled for easy mounting. This item is in stock and ready to ship, generally the following business day. Please check out all our other …

Interest Rate Models-theory and Practice …

60 Minutes – Alan Greenspan (September 16, 2007) $17.95 Airdate: 09/16/07 Alan Greenspan may go down as one of the best chairman of the Federal Reserve in American history. When Greenspan talked, the financial world listened. His 18-year tenure was marked by unprecedented economic growth, budget surpluses, and a booming stock market. So why didn’t he speak up about the sub-prime lending abuses now roiling the U.S. economy? Lesley Stahl asks just that q…

Economic Club of San Francisco – The History of the Great Depression — Can It Happen Again? $14.95 The DVD features a speech by Dr. Antal E. Fekete before the Economic Club of San Francisco given at the Chancellor Hotel in San Francisco on November 4, 2008. Q&A period followed the speech. The speaker asserted that it was not vanishing demand, but the vanishing of capital that caused the Great Depression in the 1930s, and that this vanishing of capital is happening again today….

A Guideline to Investment in the Chinese Currency (Cny) and Interest Rates Markets (Hardcover) $57.42 Global economy and financial markets are re-positioning irreversibly after the recent financial crisis. As a result, China is becoming one of the leading players on the world economic stage, and the Chinese financial markets are being integrated into t…

Interest Rate Swaps and Their Derivatives (Hardcover) $53.01 Description not available.

Interest Rates and Coupon Bonds in Quantum Finance (Hardcover) $90 “The economic crisis of 2008 has shown that the capital markets need new theoretical and mathematical concepts to describe and price financial instruments. Focusing almost exclusively on interest rates and coupon bonds, this book does not employ stocha…

Interest Rate And Credit Derivatives $89.82 Description not available.