Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 1040 - 1059)

TUESDAY 13 NOVEMBER 2007

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

  Q1040  Chairman: So the fact that you have all given roughly a good credit rating to Northern Rock to investors and they invested on that basis, you would come back to them and say, "Oh, it is nothing to do with us because it is only about creditworthiness"?

  Mr Madelain: We are very clear in our communications in what the meaning of the rating is.

  Q1041  Chairman: Back to my point earlier that some investors would invest and use that as a green light. As one commentator has said of your defence on that, whilst some can have sympathy with it, it reminds him of what the gun manufacturers say after each mass shooting in the United States, "There is blood on the floor but it really is not anything to do with us."

  Mr Hancock: We are certainly aware of these concerns and issues and we go to great lengths in trying to educate investors and others on how to use ratings.

  Q1042  Chairman: You have not done very well so far?

  Mr Hancock: By way of example, we have an event every working day of the year somewhere in Europe, and part of the efforts of those events is to get clarity on these issues. We are investing a huge of amount of time in trying to invest in the market more generally.

  Q1043  Chairman: But after the Northern Rock situation it does not seem as if there has been much success here for all three you.

  Mr Madelain: I am not sure what is the link, what is the statement that you made.

  Q1044  Chairman: Some investors use your debt ratings as a green light to invest. They have invested in Northern Rock and at the end of the day, as Mr Fallon said, you did not downgrade your ratings until September, so some people are going to find themselves on their backside as a result of that and you are then going to turn round and say, "It is nothing to do with us, mate", because this is all to do with credit risk. But we are here as the interface between Parliament and the City and the community and trying to get some handle on the situation, as Mr Fallon has tried and Mr Siôn has tried, but it is no use you then turning round to us and saying, "It is nothing to do with us." You have got to do something as a result of this now.

  Mr Drevon: On the question of are ratings misused in a certain way? Again, I think we have done a lot to try to communicate on that and maybe that is not enough. We have in fact been looking at providing more information to investors on other risks. We have been looking at terms of—

  Chairman: I think this Committee, from the evidence you have given us this morning, would think that you have really failed hopelessly on that situation Philip.

  Q1045  Mr Dunne: I would like to take us a bit above the Northern Rock situation to look at the impact of particularly the new financial structured products and your relationship with the explosion of issuance. Could you start by telling us, somebody, a volunteer, how many triple-A rated sovereign credits there are?

  Mr Taylor: It would vary by agency.

  Q1046  Mr Dunne: In order of magnitude: one dozen, one hundred?

  Mr Taylor: Thirty maybe, 30, 40.

  Q1047  Mr Dunne: How many corporates globally triple-A rating?

  Mr Hancock: A handful.

  Q1048  Mr Dunne: Banks?

  Mr Hancock: A handful.

  Q1049  Mr Dunne: Any?

  Mr Hancock: There is the Rabobank in the Netherlands which remains triple-A rated. It is the only one in Europe without public support.

  Q1050  Mr Dunne: How many structured financial products are triple-A rated?

  Mr Taylor: Thousands.

  Q1051  Mr Dunne: Can you give us some idea of the volume of issuance which is rated by you. I think one of you, I think Standard and Poor's, provided us with a figure of 34 trillion dollars of debt obligations which are currently rated. Can you give us some idea of what proportion of that is triple-A rated?

  Mr Bell: Totally or just structured finance?

  Q1052  Mr Dunne: That you look after, that you rate. What proportion is triple-A?

  Mr Bell: I genuinely do not have that number. I would say 50 to 60%.

  Mr Hancock: We can certainly revert to you with that.

  Q1053  Mr Dunne: It would be very helpful if we could have an analysis, Chairman, by rating category, by type of issuer, the volumes and the number of issuers?

  Mr Hancock: Certainly.[5]


  Q1054  Mr Dunne: That would be very helpful. How long has each agency been rating the different types of structured financial products? I think you mentioned 30 years.

  Mr Bell: About 1976, I think.

  Q1055  Mr Dunne: And is that the same for Moody's and Fitch?

  Mr Drevon: Yes, approximately. It should be the same thing.

  Q1056  Mr Dunne: But that is just for mortgage bank securities. Mr Bell, as you were saying earlier, there are some very ingenious minds generating new products all the time, so can you give us some sense for the longevity of the historic track record that you look at when you come to approach a new instrument and explain how you do that. Perhaps Moody's. If somebody comes up with a new instrument, how do you go about assessing where it sits within the rating structure?

  Mr Drevon: It is in fact very simple. The more information there is, the more track record there is, the clearer we have a view of what could be future performance and we can evolve models around that. To the extent that there is a new instrument that comes in which has virtually no track record, it would be very difficult for us to come to a conclusion.

  Q1057  Mr Dunne: Does that mean you do not offer rating or you do offer rating?

  Mr Drevon: No, we may decide there is not enough information or enough data made available to assign a rating. That is quite possible. It is certainly the case in some emerging markets, it may be the case for a new type of asset class, but typically, again, if you look at some of the large asset classes which have been discussed, and mortgages, in most markets there is sufficient data being made available now and some of the new asset classes, like collateralised debt obligations, have been around for approximately ten years now.

  Q1058  Mr Dunne: After what point do you start to issue ratings?

  Mr Drevon: There is no specified point in terms of—

  Q1059  Mr Dunne: Let us take collateralised debt obligations, which have been going for ten years. How long did it take before you started to provide ratings?

  Mr Drevon: Collateralised debt obligations, they started with the repackaging of corporate debt, so we had a lot of information on the underlying risk, which is a corporate debt. So, we could have assigned these instruments very rapidly, again, on the basis of the underlying data. I think we have to look at what also goes in the structured fund's instrument.


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