Examination of Witnesses (Questions 1040
TUESDAY 13 NOVEMBER 2007
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
Mr Bell: Totally or just structured
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.
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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