Representatives from Moody's and Standard & Poor's stopped short of apologising for the losses suffered by investors after they failed to spot the crisis brewing in the US sub-prime mortgage market, despite being repeatedly pressed by the Treasury Select Committee....
During the session, in which witnesses faced a hostile line of questioning from MPs, the agencies seemed to want to play down their role and stressed that investors should base their decisions on a range of opinions and information, and not just those of the ratings agencies.
"Ratings are opinions. They are one piece of important information which is available to the market and investors, but there are many other pieces of relevant information around about credit decision making," Mr Crawley said.
"We have been clear that we do not expect an individual investor, or at the other end of the spectrum a sophisticated asset manager, to rely solely on what we provide."...As previously discussed, the rating firms' business model is built on the idea that they have access to relevant data that other market participants do not. Hence, there is a reason that ratings are one piece of important information.
In the case of structured finance securities, prior to the financial crisis, it was assumed and the rating firms did nothing to dispel the notion that the rating firms had access to and used in their ratings current information on the assets that served as collateral for each security.
This current data was not available to the other market participants.
In the fall of 2007, the rating firms testified before the US Congress that they did not have current data on the performance of the underlying collateral and in fact that they did not have any different access to information on the underlying collateral than other market participants.
Mr Tyrie made it clear he was unhappy with the outcome of the session in his concluding remarks, and said issues including competition within the sector, regulation and the debt issuer pay model would be explored further.
He said: "It appears that you have left the committee unconvinced that many of the problems attached to risk rating agencies in 2008 have yet been adequately addressed."
Following the session Mr Tyrie added: "If even one of the ratings agencies had drilled down deeper into the structure of products developed [in the run-up to the crisis] and challenged them, we would all be in a much better place now."The simple solution for eliminating the financial market's reliance on a small number of rating firms and unfreezing the current frozen structured finance markets is to require ultra transparency.
In the case of structured finance securities, ultra transparency is next business day disclosure of an observable event (for example, a loan payment, a delinquency, a default, a loan modification) involving the underlying collateral.
With observable event based reporting, market participants would have access to the current performance of the underlying collateral. As a result, not just the current rating firms, but anyone who wants to could rate the securities.