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Transparency has reduced rating role

Legal & General head of credit research Georg Grodzki says if credit ratings were scrapped market volatility would not necessarily increase.

Giving evidence to the Treasury select committee last week, Grodzki said there is far more transparency over companies’ financial affairs now compared with when the rating agencies were at the height of their power in the 1970s.

He said: “Not having agencies would not necessarily lead to more volatility. Compared with the 1970s, there is a lot more transparency about corporate financial affairs. It is now much easier to analyse a company without the privileged access to proprietary information which the agencies sometimes dwell on as their competitive advantage. The market is less disadvantaged these days relative to rating agencies.”

Proposals from the European Commission for new rating agency regulation could mean that institutional investors are required to do their own due diligence. Credit ratings agency III also wants investors to reduce how often they use external ratings.

Grodzki added that while small investors might struggle to scrutinise all the corporate information now available in the public domain compared with better resourced large investors, they are “not completely in the dark”.

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  1. I agree. Not only are the credit rating agencies incompetent, which they’ve repeatedly proven, but they are also irrelevant. Look at the market’s reaction after the U.S was downgraded. U.S. debt rallied. That is because the markets already set the credit worthiness of any borrower that has outstanding paper. The price is out there. The price of credit default swaps is out there. That is the ‘real’ credit rating of a sovereign or corporate borrower. Ratings are both redundant and dumber than the crowd-sourced price that already exists. I talk about the failure of the credit rating agencies in my book “Jackass Investing.” I’m pleased to provide readers with a complimentary link to the chapter in which they’re discussed (Myth #13: It’s Best to Follow Expert Advice):
    http://bit.ly/ugSnBf

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