This page has been archived and commenting is disabled.
Rating Agency Feud: S&P vs. Dagong…For Now
Dian L. Chu, Economic Forecasts & Opinions
It all started almost a month ago when Dagong, the largest credit rating agency in China, took on S&P, Moody’s and Fitch. Dagong issued its first international sovereign risk report on July 11 by giving 27 countries out of the 50 a markedly different rating than the Western big three.
Dagong did not stop there. It also openly slammed the Western rivals in a Financial Time interview that
"The reason for the global financial crisis and debt crisis in Europe is that the current international credit rating system does not correctly reveal the debtor's repayment ability."
Guan Jianzhong, chairman of Dagong later also criticized Moody's, Standard & Poor's and Fitch of becoming politicized, “too close to the clients”, ideological and losing their objectivity.
Harold "Terry" McGraw III, the chairman and chief executive of McGraw-Hill companies, which owns Standard & Poor’s credit agency, finally went on record and told the Financial Times on August 3 that S&P, Moody's and Fitch Ratings were being made populists’ scapegoats.
According to FT, McGraw’s populism remark was partially directed to Dagong. McGraw also questioned Dagong’s own transparency and methodology, and said “I haven’t seen that much on the analysis part.”
As for S&P’s role in the financial crisis, McGraw said the agency had merely made “a few honest, technical mistakes” to have totally missed on the US housing recession. (You think the House oversight committee would beg to differ?)
Less than 24 hours after, in an exclusive interview with Xinhua, Guan rebuts S&P with some sharp replies as reported by Xinhua:
“The accusation is irresponsible for the western rating firm to label a new-born international rating agency as "populist", instead of carrying out self-criticism on its own highly politicized rating standards."
"Standard & Poor's failed to identify the debtor nations' currency depreciation, which infringed on the interests of the creditor nations, as the sovereign debt default. Such practice is the fundamental cause weighing on the instability of the international credit system,"
Moreover, Quan said the independence of some U.S. rating firms needs to be questioned due to the close relationship between the shareholders and their clients," adding Warren Buffett is the largest shareholder in Moody's.
Interestingly, separate news reports said Dagong might delay its American credit rating market entry plans, after the SEC had in April this year rebuffed Dagong's application, as it does not have local offices or provided ratings services to American companies.
Meanwhile, Standard & Poor's assigned Moody’s to a BBB-plus rating on Tuesday. Most likely, Moody’s association with Dagong via a three-year co-op agreement back in 1999 probably has absolutely nothing to do with this downgrade.
However, since McGraw did say he thought S&P would come out of the current period “bigger, better and stronger”, could Fitch be the next on S&P's downgrade list?
Dian L. Chu, Aug. 5, 2010
»
- advertisements -
The NRSRO's are like bald men fighting over a comb. If legislation doesn't kill them, the lawsuits - against them or those who chose to use them - will. O-rings on the global financial crisis indeed.
These two remind me of the nut-shooting standoff in the pub basement from Inglorious Basterds.
Dagong is obviously the emerging master of the sports of Rating Fu. Whereas the old ones have strayed from their ways... and are in dire need of asskicking.
Any chance of seeing Dagong begin operatons in US this year?
The three monkeys, that's the US credit agencies:
See no evil; hear no evil; speak no evil.
So far Dagong has given the most salient and credible of observations on its American brethern.
Now, some would suggest that Dagong being a CHinese entity is held sway under the powers that be in China.
Now some would also say that Moody's, S&P and Fitch should have been held swayless by US regulators.
Even Steven by my book.
The rating agencies knew they were blessing crap. They knew that they were making a silk purse from a sow's ear. The idea that by spreading the risk, the risk itself goes away is just self-serving nonsense, given that everyone is doing the same thing (systemic risk). Particularly when the underlying assets, such as mortgages are based on wildly inflated collateral, not to mention the hazards of leverage involved. They have a responsibility to see the whole picture--it's their job and their responsibility to get ratings right. They did not do their job because they were paid by the entities they were rating. Ironically, the effect of this was to destabilize the system and invalidate the very models they were using. Thus the rating agencies had a responsibility to point out their own role in rendering the models they use invalid, as part of the rating process:
"Caution is advised in relying on this rating due to the fact that there is a conflict of interest, wherein we are paid by our clients to rate our clients' securities. This has a direct effect on the validity of the underlying models that we use in the rating process, thus potentially rendering the rating process itself invalid."
These ratings are the O-rings of the current economic implosion.( Would that Richard Feynman were here to set everyone's thinking straight on this!)
Hahaha, Feynman would look at the structure of the global monetary system, laugh until he wet himself, and then walk away shaking his head, because it truly is nothing more than a shoddily-rendered dark comedy.
Even the logical contradictions in Quantum Mechanics make more sense than what's going on the financial world these days.
Best answer is a free market where the govt competes with the rest and a rating agency funded by a rating tax on all companies,0.001% on profit should do
That ensures less cartelisation,
less monopolies- price fixing,
more breathing space for rating agencies to act independantly
But can't help if the whole setup is orchestrated as it is now!
I'd love to work for Dagong here in the states. A new voice is needed.
"As for S&P’s role in the financial crisis, McGraw said the agency had merely made “a few honest, technical mistakes” to have totally missed on the US housing recession."
And this guy runs a company that determines the relative financial stability of corporations and governments? LOL, epic fail...isn't that sort of like asking a veterinarian to perform neurosurgery on a head trauma patient? Apparently, and empirically speaking, it is...
Memo To: Deep.Shah(at)moodys.gov
From: booyah(at)cnbc.gov
Subject: you've been dagonged!