Overrated?

Our advice to them: pay if you get it wrong

ALittle wonder people are beginning to ask: who rates the raters?

PRIL is the cruellest month, says T.S. Eliot in his poem The Waste Land. It would have been so had it not been for the glad tidings of the renegotiated East Coast Rail Link following the signing of the supplementary agreement on April 12 between Malaysia Rail Link Sdn Bhd and China Communications Construction Company Ltd. First came FTSE Russell’s announcement on April 15 that it may exclude Malaysian debt from the FTSE World Government Bond Index because of market liquidity issues. Three days later, Moody’s Investors Service issued a note stating that the Malaysian government’s aid to Felda is a credit negative. Then came the United States government’s inclusion of Malaysia in the kidnapper “K” list. All this, when there is a strong European anti-palm oil lobby at work against Malaysia. Coincidence? Granted, coincidences happen, but when it is made to happen, it ceases to be one. The plot thickens, we must say.

Little wonder people are beginning to ask: who rates the raters? The Economist did ask this on March 23, 2005. Here is what the well-received newspaper said: “The credit-rating industry is curiously devoid of competition and oversight. It needs more of both.” We agree. Credit-rating agencies have managed to create an industry that is so powerful that even a country wouldn’t dare issue a debt without a rating from Moody’s, Standard & Poor’s (S&P) or Fitch, the big three raters. A subsidiary business has also grown around the rating operation — businesses advising corporate and country clients on how to impress the raters. While The

Economist praises the raters’ overall record, it does question why they let the crises at Enron, WorldCom and Parmalat slip by. They are not infallible.

But others — companies that sell their opinions (rating is after all an opinion) — pay a hefty negligence bill. David A. Maas of the US Northwestern University School of Law in his comment piece titled “Policing the Ratings Agencies: The Case for Stronger Criminal Disincentives in the Credit Rating Market” in the Journal of Criminal Law & Criminology (Vol. 101, No. 3) suggests “that a tailored criminal law targeting the rating agencies would provide a justifiable and powerful control mechanism for high-risk misconduct. Maas did, however, admit that “strict civil laws could similarly deter misconduct” though “compliance with and enforcement of civil regulations would be inefficient and expensive”. Such a call for action is best understood in the context of two emails exchanged between S&P’s analysts quoted by Maas. Analyst one: “It could be structured by cows and we would rate it.” Another replied, “Let’s hope we are all wealthy and retired by the time this house of cards falters.” Reuters too quoted the first email in a case filed in New York state court in Manhattan against Moody’s, S&P and Fitch over failed Bear Stearns funds on Nov 12, 2013.

As for the “K” rating of Malaysia, we say this to the US: do not invent kidnappers as you would weapons of mass destruction.