RatingAgency.com is the first blog and podcast covering the people and activities of the credit rating agencies. We'll be keeping track of personnel moves, criteria changes, and profiling the most powerful unknown players on Wall Street -- the bond analysts who move the capital markets.
Gasparino’s book, The Sellout, goes on sale in November. If this interview is any indication of how he feels about the rating agencies, the book probably will not be on the reading lists for the credit training classes the agencies run.
Off the Record - CNBC.com
Shared via AddThis
posted by Steve Lubetkin at
7:36 AM
Steven is the managing partner of Lubetkin & Co. LLC, a diversified public relations, Internet broadcasting, and communications consulting practice, and its Professional Podcasts LLC subsidiary, which produces audio and video podcasts. His career includes senior executive positions in corporate communications at Bank of America, FleetBoston Financial, and Summit Bank. He has also held a wide range of management positions in public relations, and corporate and internal communications, at Standard & Poor's, the world's largest bond rating agency; Unisys Corporation, a technology firm, and Consolidated Rail Corporation, one of the nation's largest freight railroads. Steve has held a wide range of leadership positions in PRSA, including a three-year term on the National Board of Directors.
Subscribe to
Posts [Atom]
3 Comments:
Gasparino's breathless smoking-gun question is no great mystery. Structured finance analysts were paid more due to supply and demand. Mystery solved. This guy wrote a whole book on this stuff? Must be large type.
The reason why the agencies will never be fixed is because outsiders don't really understand the true problem. Conflict of interest and the issuer pays model have nothing to do with it. The fault with the business model lies in the fact that the rating agencies are public companies (or, in the case of S&P, the only viable business embedded within a public company) that face quarterly earnings pressure and, as a result, try to position themselves for growth.
The agencies have no real control over revenue - deal flow is what it is. So they focus on expenses. Analyst churn at the agencies is near fast-food levels during expansionary periods on Wall Street. But people almost never leave the management ranks. Middle managers making $400,000 to $600,000 a year who have never worked anywhere else and have little grasp of current capital markets and securities are unemployable elsewhere. Yet that's the profile of virtually all mid-level and above management.
Since quality of analysis isn't a focus (because management, in general, has no incentive to produce strong analysis), little effort is made to retain good analysts. In fact, turnover is good from mgmt's perspective - new MBA hires with no credit or industry experience make less than half of what a seasoned director makes. Thus, you often have very junior analysts with little senior guidance grappling with investment bankers, issuers, investors and private equity in a contest that is usually over before it starts. Since the regulators have handed the two big agencies complete dominance over credit assessment for the debt markets, Moody's and S&P are free to staff as poorly and cheaply as they please to maintain their insanely fat margins.
How do you fix this? The agencies have proven time and again to be unwilling to do it themselves and frankly, when management is the problem it's not very realistic to expect that they would be quick to point the finger at themselves. The only real options are to either nationalize (which, when you think about it, makes some sense - it's a quasi-regulatory function the agencies perform) or decertify. Market indicators have become sophisticated enough that they often drive rating actions. S&P has an enterprise software package it has developed that uses a basket of market indicators to rouse slumbering analysts and compel rating changes. Since the agencies seem to miss the boat just about every time it matters, surely a new system that de-emphasized (or eliminated) credit ratings as currently provided would not mean market chaos. Undoubtedly, new models and entrants (perhaps hybrids involving some elements of the current agencies) would surface and creative, effective solutions would result.
Could he not have been more obvious that this interview was about the sale? In other words, the interview about a book entitled "The Sellout" should be called "The Sale: Buy my Book".
Take this all with a grain of salt.
Post a Comment
Links to this post:
Create a Link
<< Home