Do We Want a World Without Ratings?
Posted by Heidi N. Moore
The best time to get rid of firm guidance on complicated securities is in a bear market.
And by “the best time,” we mean, of course, “the worst.”
And yet, consider the Securities and Exchange Commission’s new push to reduce the importance of the ratings offered by Moody’s Investor Service, Standard & Poor’s, and Fitch Ratings. Our colleagues wrote today, “If regulatory changes succeed, ratings would become more of a guide, but not a quasi-regulation from the government on what investors can or cannot hold….Rating firms haven’t protested this line of thinking, saying that they don’t want their ratings to be misinterpreted as a catch-all recommendation to buy a security.”
Therein lies the rub. Ratings providers are, naturally, gun-shy about taking responsibility for the performance of complicated securities. And they already wear a Scarlet AAA for allegedly underestimating the default risk on complicated securities. The ratings firms valiantly blamed a computer error for the misunderstanding, but explanation did nothing to allay investors’ concerns.
It isn’t just ratings providers that are backing away from responsibility. Take the monoline bond insurers, including Ambac Financial Group and MBIA. These businesses, which are supposed to guarantee investors that municipal bonds are perfectly safe, took their own risks on complex securities. And instead of cleaning the toxic securities off their books, the monolines recently asked not to be rated at all.
And then look at much of Wall Street equity research, where the pages of disclosures are frequently longer than the actual reports. Last week, Goldman Sachs Group analyst Mark Wienkes downgraded both XM Satellite Radio Holdings and Sirius Satellite Radio, hitting their shares. But his rating was a “conviction sell,” which is a Goldman term that makes it clear just how much these ratings are based on an analyst’s individual beliefs.
In fact, the post-Spitzerian move away from “buy, sell, hold” to “underweight” and “overweight” shares casts an air of vagueness over the whole enterprise of financial advice, a disingenuousness by professionals whose entire business model depends on their being considered experts on what to buy. Yet they don’t actually want to be responsible for telling people what to buy.
That transforms the world of Wall Street investing into a madcap, choose-your-own adventure book. Money managers learned long ago to reduce their dependence on stock research, but debt securities are a lot harder to value. Bond insurers, investment banks and the Federal Reserve all depend on ratings as a way to defend their investing and other decisions. But even if the ratings providers keep their analysis the same, it won’t have the conviction of a specific call. It is no wonder, then, that the primary problem around the markets right now is one of confidence. It’s hard to know who to believe.
AI
