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Article on Rating Agencies


txlaw
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Here's a link to an interesting article on rating agencies with a description of the Canadian rating agency, DBRS.

 

"Rating Agencies at the Crossroads," http://www.theglobeandmail.com/report-on-business/crash-and-recovery/ratings-agencies-at-the-crossroads/article1287567/

 

There's also a quote from Paul Rivett of Fairfax in the article:

 

“A good way to do it, and a fair way to do it, would be to have investors who use their services – research and ratings – pay for it,” says Paul Rivett, a spokesman for Fairfax Financial Holdings Ltd. “If [the agency is] not good and the analysis is not sound, no one's going to pay.”

 

I found the article via a Zerohedge post on ratings agencies and Canadian public pension funds: http://www.zerohedge.com/article/rating-public-pension-funds

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Here's a link to an interesting article on rating agencies with a description of the Canadian rating agency, DBRS.

 

"Rating Agencies at the Crossroads," http://www.theglobeandmail.com/report-on-business/crash-and-recovery/ratings-agencies-at-the-crossroads/article1287567/

 

There's also a quote from Paul Rivett of Fairfax in the article:

 

“A good way to do it, and a fair way to do it, would be to have investors who use their services – research and ratings – pay for it,” says Paul Rivett, a spokesman for Fairfax Financial Holdings Ltd. “If [the agency is] not good and the analysis is not sound, no one's going to pay.”

 

I found the article via a Zerohedge post on ratings agencies and Canadian public pension funds: http://www.zerohedge.com/article/rating-public-pension-funds

 

Here is a timely example:  http://www.claimsjournal.com/news/international/2009/09/23/103997.htm

 

"Standard & Poor's Ratings Services has assigned its preliminary 'BBB-' senior unsecured debt, 'BB+' subordinated unsecured debt, and 'BB' preferred shares ratings on Fairfax Financial Holdings Ltd.'s US$2 billion universal shelf, which was filed on Sept. 18, 2009. S&P said Fairfax exhausted its prior Aug. 31, 2009, US$1 billion shelf to fund the pending acquisition of the outstanding common shares of Odyssey Re that it currently does not own. S&P added that it is "unaware of any new strategic expansion initiatives that would require an immediate draw upon the new shelf. In addition it said the "ratings reflect Fairfax's strong business and financial profile. Fairfax, through its insurance operating subsidiaries, including Northbridge Financial, Crum & Forster, and Odyssey Reinsurance, maintains a competitive presence in the North American commercial insurance marketplace, as well as in the global reinsurance market. Fairfax reported consolidated pretax operating income of US$373 million in the first half of 2009, a satisfactory combined loss and expense ratio of 98.4 percent, and total shareholders' equity of $5.6 billion."

 

These people are just stupid...They're rating a shelf filling now..and they're doing it wrong.  In what world is it practical to ignore significant changes since quarter end...like an increase of equity of over 1.5 billion.  If Fairfax lost 1.5 Billion+ they'd be going nuts but a gain in equity isn't substantial enough for the interns at a publishing company to raise the rating. 

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Here's a link to an interesting article on rating agencies with a description of the Canadian rating agency, DBRS.

 

"Rating Agencies at the Crossroads," http://www.theglobeandmail.com/report-on-business/crash-and-recovery/ratings-agencies-at-the-crossroads/article1287567/

 

There's also a quote from Paul Rivett of Fairfax in the article:

 

“A good way to do it, and a fair way to do it, would be to have investors who use their services – research and ratings – pay for it,” says Paul Rivett, a spokesman for Fairfax Financial Holdings Ltd. “If [the agency is] not good and the analysis is not sound, no one's going to pay.”

 

I found the article via a Zerohedge post on ratings agencies and Canadian public pension funds: http://www.zerohedge.com/article/rating-public-pension-funds

 

 

The user-pay model seems like it could be circumvented by intermediaries. If PG&E, for example, wants to issue debt, then Goldman Sachs can act as the initial purchaser, contingent upon the receipt of a satisfactory rating. In this case, satisfactory implies a rating that allows GS to resell the securities at a slight premium.

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What's wrong with treating this the same way that we treat External Audits, External Actuarial Valuations, etc?

 

A once/yr rating. The provider has to meet int'l standards, carry insurance, & have their opinion (& overall coy rating) published in the year-end financials. The company pays, & provides the same access as they would to any other external auditing group.

 

A in-year rating by anyone other than this rater becomes suspicious (how accurate can it really be if they dont have the same information ?), & the rater has an incentive to minimize rating inflation & poorly understood debt structures - because if it blows up they get sued. No more 'miss-understanding', 'inadequate access to financial records', poor 'communication', etc. If you choose to rate, & get it grossly wrong (Canada's Asset Based Commercial Paper) - you're out of business (as you've demonstrated that you're not reliable, as you clearly did not understand the risks sufficiently well enough to cast judgement).

 

'Shopping' for ratings, auditors, actuaries has the same penalty. Do it too often, you're no longer trust worthy & you've made yourself a short-selling target - except that with no-one believing you, the result is rapid bankruptcy. Darwinism alive & well.

 

Perhaps we'll see just how incompetent most rating agencies are ?

 

SD

     

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