Seven Investment Management director Justin Urquhart Stewart has attacked rating agencies, saying the system is open to conflicts of interest.
Urquhart Stewart says the reliability of ratings has come into question, given that 93 per cent of AAA-rated sub-prime mortgage-backed securities in 2006 have now been downgraded to junk status.
He says that while a number of agencies started as market researchers, providing assessments of products for those looking to invest or use those facilities, they have turned into something different – to the point where they are almost being hired by those selling the debt to provide a seal of approval.
He says: “There is an obvious conflict of interest and it was becoming apparent that various firms were selecting their preferred rating agency according to the likelihood of which one was going to give them the most favourable verdict. The system is inherently open to abuse and this has been corroborated by a US Senate subcommittee, which has been turning over some stones to reveal some very unpleasant truths.”
Urquhart Stewart also questioned the relevance of rating agencies when it comes to the UK potentially losing its AAA UK gilt debt status.
“Most of the time, I find that the output of such agencies normally provides us something as helpful as yesterday’s weather forecast. Of course, you can just bypass the agency and see how, say, UK debt is being judged by the price in the market. Any downgrade makes UK debt a forced sale, which, in a bad market, can make things considerably worse.
“What should be done? Control of who pays the agencies, that is, not the product seller? Centralising all ratings through a regulatory body? Either way, this must be addressed.”
An S&P spokesman says: “The performance of our ratings on many US mortgage-related securities issued between 2005 and 2007 has been very disappointing, like many others, and we have taken steps to address that. However, the vast majority of our ratings have performed well during the global crisis.”