Credit rating – a mystery no longer?
Jinfo Blog

15th May 2010

By Tim Buckley Owen

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Just when they thought they might have got off pretty lightly, the credit rating agencies are being clobbered again. Within just one week the United States Senate, the New York Attorney General and financial information provider Bloomberg have all been gunning for them. In amendments to the Restoring American Financial Stability Act, the Senate has voted to instruct the Securities & Exchange Commission (SEC) to assign a credit rating company to rate a particular offering, instead of allowing an issuer to perpetuate a conflict of interest by asking the agency itself. Senators also approved a measure to write reference to the agencies out of the law altogether, thereby denying them their ‘government sponsored monopoly’ (http://digbig.com/5bbphx). Widely reported in the media, the development was naturally covered by Bloomberg (http://digbig.com/5bbphy). But Bloomberg may be taking an extra special interest because it reportedly intends to launch its own rating service to rival those of the Big Three – Fitch, Moody’s and Standard & Poors. Confronting stringent new quality controls, first from the European Union (http://www.vivavip.com/go/e19183) and subsequently from the United States Treasury (http://www.vivavip.com/go/e22305), the rating agencies have been on the defensive ever since the financial crisis broke. Now New York Attorney General Andrew Cuomo is looking at whether the relationship between certain banks and the agencies was manipulated to gain better ratings for risky securities (widely reported, including by the FT – http://digbig.com/5bbpjc – and BBC – http://digbig.com/5bbpja). And now there’s Bloomberg. Already poised to challenge both LexisNexis and Thomson Reuters in legal information (see Michele Bate at http://www.vivavip.com/go/e27998), Bloomberg has also been quietly breaking with its previous practice by going on the acquisition trail, purchasing first BusinessWeek (Penny Crossland at http://www.vivavip.com/go/e25656) and subsequently the American government data publisher Eagle Eye Publishers (http://www.vivavip.com/go/e28192). Bloomberg’s new quantitative tool will gather public information on a debt issuer, then calculate the issuer's relative creditworthiness using an equation, a spokeswoman has said. This is different from the rating agencies, which also have access to some non-disclosed information and offer opinions based on it (information from Dow Jones via the Wall Street Journal – http://digbig.com/5bbpjd – subscription required). According to Dow Jones, Bloomberg doesn't intend to request SEC certification as the rating agencies do, because it considers its service a tool, much like its graphing functions, rather than a credit rating. In turning rating from an esoteric ritual into a simple calculation, could Bloomberg finally sound the death knell of the agencies' flawed business model? However, it’s a short step from automated credit calculation to algorithmic trading – trades executed automatically when predetermined conditions are met. These present their own risks (see http://www.vivavip.com/go/e17065 for example); in removing whatever judgment the rating agencies apply, could this simply be a case of substituting one hazard for another?

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