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‘Hopeless failures’ by rating agencies

Treasury select committee chairman John McFall says rating agencies have “failed hopelessly” to ensure investors are fully aware of what their ratings stand for and were slow to react to the Northern Rock fiasco.

At a TSC meeting on Tuesday, McFall blasted Standard & Poor’s, Moody’s and Fitch Ratings for failing to make it clear to investors that their ratings should not be seen as a green light to buy securities.

He criticised them for not downgrading Northern Rock until September and said a lot of people have found themselves facing problems because of those decisions.

McFall said: “I think we have found out from the evidence of the session this morning that you have really failed hopelessly on that situation.”

S&P managing director and head of European structured finance Ian Bell admitted some investors may have viewed its ratings as a green light to invest.

S&P managing director and head of European corporate and Government services Barry Hancock said: “I think we are certainly aware of these concerns and issues and we go to great lengths to try and educate investors and others on how to use the ratings.”

Fitch Ratings group managing director for financial institutions Charles Prescott said it has set up a working party to look into whether it will provide a separate rating or tool for liquidity risk in the wake of the Northern Rock crisis.

S&P and Moody’s said they will consider similar measures.

Expert witness Professor Willem Buiter, a former monetary policy committee member, hit out at the FSA for focusing more on capital adequacy and solvency issues rather than liquidity issues. He said: “The FSA throughout all this seems to have been asleep on the job.”

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