Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 960 - 979)

TUESDAY 13 NOVEMBER 2007

MR PAUL TAYLOR, MR CHARLES PRESCOTT, MR MICHEL MADELAIN, MR FRÉDÉRIC DREVON, MR IAN BELL AND MR BARRY HANCOCK

  Q960  Chairman: Standard and Poor's provide those services as well. Do Fitch provide those services?

  Mr Taylor: Actually, no. We are representing Fitch Ratings. We do not provide those services. We have a sister company, which is a completely different company, a different management structure.

  Q961  Chairman: There are Chinese walls between you.

  Mr Taylor: It is a different company, who do provide those services.

  Q962  Chairman: So you provide those services. Okay.

  Mr Madelain: What is important is that those services are unrelated to ratings.

  Q963  Chairman: You agree with two of the three points that Professor Buiter is making and, as a result, he came to the conclusion, as Professor Wood did, that you are inherently and deeply conflicted.

  Mr Madelain: The issue of pay model, which is what you have just described, is effectively creating a potential conflict. What we do believe is that we do manage that conflict effectively, as has been demonstrated by our track record in this area and also I think, as we have stated many times, by the importance of our reputation for the viability of the services we provide.

  Q964  Chairman: Why is your reputation under such scrutiny at the moment? Why are you getting investigated on Capitol Hill and you are considered right at the centre of the sub-prime market? You seem to be the architects of the rating of this and the fact that there are problems, in fact global problems, associated with it. You are perfectly decent guys. Why did you get yourselves centre stage here?

  Mr Drevon: You know, we have been in the market for many years rating different instruments and so we are used to be being under scrutiny for the simple reason that we provide a very public opinion about credit risk. It is very easy to point a finger at a rating agency because that public opinion is available in the market place, and so we are used to having to defend our opinions and we do that on the basis of our track record, which we publish, which clearly shows that our ratings have a very predictive power in terms of differentiating credit risk. In terms of your specific comment, which was in relation to our role in the sub-prime market—

  Q965  Chairman: I ask questions; I do not make comments.

  Mr Drevon: I am sorry. In terms of your specific question in terms of our role in the US sub-prime market, I think we have been quite clear also, and I think we included that in our submission.[2] We did not design the securities, we did not originate the underlying mortgages, we are not investors; we provided one specific role, which was the credit opinion about credit risk.

  Q966  Mr Fallon: Nevertheless, you are selling services to the people you are supposed to be regulating. That is the position, is it not?

  Mr Bell: Undoubtedly there is a potential conflict of interest. It is well known to the market.

  Q967  Mr Fallon: You are selling services to the people you are supposed to be regulating.

  Mr Bell: We do not regulate; we merely express opinions as to the credit risk.

  Q968  Mr Fallon: You are part of the regulatory system and you are selling services?

  Mr Madelain: I think we need to be clear on that point. I am not sure what you mean by "selling services".

  Q969  Mr Fallon: You take fees.

  Mr Madelain: The business model we have is that the fees are paid by the issuers of securities, yes.

  Q970  Mr Fallon: Let us just be clear about this. Did any of you take fees from Northern Rock?

  Mr Hancock: Yes.

  Mr Taylor: Yes.

  Q971  Mr Fallon: You took fees from Northern Rock?

  Mr Taylor: There has never been any denial of a conflict of interest in the issuer pays models. There is nothing secret, there is nothing surprising, about that.

  Q972  Mr Fallon: Then you will tell me Mr Taylor, how much fee you took from Northern Rock, if it is not a secret.

  Mr Taylor: I do not know the number.

  Q973  Mr Fallon: Roughly?

  Mr Taylor: I do not know the number.

  Q974  Mr Fallon: How much a year do you charge Northern Rock?

  Mr Taylor: I do not know the number.

  Q975  Mr Fallon: Does anybody else know what they charge Northern Rock?

  Mr Hancock: I could not tell you, no.

  Q976  Chairman: Is it a substantial sum?

  Mr Taylor: In the context of our overall business, almost certainly not. I do not actually know the number.

  Q977  Chairman: Could you write to us with that and give us a number so that it is a matter of public record.[3]

  Mr Taylor: It is commercially sensitive. I am sure we could let you have—

  Q978  Mr Fallon: You told me it was all open and above board.

  Mr Taylor: No, we do not disclose the fees paid by individual issuers to us.

  Q979  Mr Fallon: The reason I am asking you this, Mr Taylor, is that the submissions you have all made to us make it very clear that, apart from the downgrade the day the interim results came out, there was no change in your opinion of Northern Rock from 2006 until after 14 September. Why was that? Was it because they were paying you?

  Mr Prescott: No, it is obviously not because they were paying us. We look at every issue in its own right and we will decide what actions to take depending on the circumstances and the information that is available to us.


2   Ev 280 Back

3   See Ev 264, 276, 285 Back


 
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