Examination of Witnesses (Questions 1120
TUESDAY 13 NOVEMBER 2007
Q1120 Jim Cousins: In that case,
how can you tell us it is reflected in your ratings?
Mr Madelain: The rating reflects
information that is made available to us.
Q1121 Chairman: Let us move on. As
a general rule, can we say that rating agencies do not change
a rating until something happens? In other words, you use historical
Mr Hancock: I am sorry, could
you repeat that? We could not hear.
Q1122 Chairman: Rating agencies do
not change a rating until something happens; in other words you
use historical data to assess the ratings.
Mr Hancock: No, not necessarily
so. We certainly have our opinions about the future and we incorporate
our opinions for the future into our ratings. They are forward-looking
Q1123 Chairman: Some submissions
have indicated to us that the credit ratings side of your business
has quite a high margin, something like 50%. What margins does
the credit rating side of your business have?
Mr Taylor: I do not actually have.
It is a disclosed number in our public accounts. I am more than
willing to provide it to you.
Q1124 Chairman: Roughly.
Mr Taylor: It is certainly less
than 50%. We have a different business model, perhaps, to our
Mr Drevon: Approximately 50%.
Mr Bell: Unfortunately, different
from the other ratings agencies. Standard and Poor's is part of
McGraw Hill, which is a listed US corporation, and unfortunately
McGraw Hill does not break out that number, so under US securities
laws I am informed that I am not at liberty to disclose that information.
Q1125 Chairman: So if I wrote to
you, could I get that information: the credit business side of
Mr Bell: The McGraw Hill Corporation,
if it were to disclose that number, would have to do it in accordance
with the regulation FD on selective disclosures. I am not an expert
in American securities law.
Q1126 Chairman: Moody's you are 50%?
That is the only answer we have got.
Mr Drevon: Approximately, yes.
Q1127 Chairman: Okay. On Basle II
you heard Professor Buiter saying that no-one any longer trusts
the rating agencies' judgment of the creditworthiness of complex
structured instruments and, therefore, that puts a huge hole in
Pillar 1. Do you agree with that?
Mr Drevon: No, we do not. There
is no, I think, proof that investors have lost confidence in rating
agencies. In fact, over the summer we have done a number of outreaches
to investors, including very large conference call conferences,
and there is still a large degree of interest from the investor
community on our opinion about credit risk. On Basle II, perhaps
I can refer to our earlier comment, which is that we are not in
favour of using ratings in regulations.
Q1128 Chairman: You are all aggressively
now related with downgrading mortgage-linked securities. I think
it is because of that that Professor Buiter has made his comment.
It seems that it is a legitimate comment that he has made.
Mr Bell: I think it is a legitimate
comment, but I would echo the words of my friends from Moody's,
which is that during our interaction in Europe with investors,
what we have found is that there is a sense that, yes, the ratings
in the US sub-prime did not go the way they were expected to go,
but that has not led them to lack confidence in all our work in
structured finance. Equally, with Basle I, as Moody's have always
said, we were not in favour of being incorporated in Basle I,
we did not think it was appropriate.
Q1129 Chairman: At the moment, in
terms of complex structured products and the downgrading you have,
do you think you still have the confidence of the market in terms
of your judgment of creditworthiness of these structured instruments?
Mr Bell: I think that the market,
quite legitimately, is asking questions which I think it is incumbent
upon us to answer.
Q1130 Chairman: So it does not have
full confidence in you?
Mr Bell: I think the market is
diverse. I think some people continue to have trust in us.
Q1131 Chairman: Largely speakingwe
are addressing the generalitiesyou think that the market
does not have full confidence in you at the moment?
Mr Bell: The market is not one
single entity; therefore it is not a binary answer.
Q1132 Chairman: But a large part
of the market does not have full confidence in you. Is that right,
Mr Drevon: No, in fact if the
market did not have confidence or was not interested in ratings,
it would ignore completely our downgrades. It has been the opposite.
The downgrades have a significant impact on the market and therefore
Q1133 Chairman: You are keeping this
whole confidence in the market. You are coming here and telling
Mr Drevon: Again, I think the
proof will be in the future.
Q1134 Chairman: I am really asking
you for the present. We get lots of submissions into the Committee,
and the reason I am putting that comment to you is that most people
put that to me, and that is why I am putting it to you. Fitch,
do you have the confidence of the market?
Mr Taylor: Actually I think we
do. A comment I made earlier was that investors had not been focused
on credit over the last couple of years. Sub-prime is a very specific
situation. It is about 3% of the credit market, to keep it in
perspective. Do you want me to answer the question?
Q1135 Chairman: Of course?
Mr Taylor: So investors have not
been focused on credit. I think in the last few months they have
refocused massively on credit. We have never been busier in terms
of dealing with investor inquiries, investor discussions, so I
absolutely think they still see value in what we do. It would
be completely arrogant to say we cannot learn lessons from what
has been going on, but I do think investors continue to value
the core product of what a rating is.
Q1136 Chairman: I would suggest maybe
to people in the market that could come across this that there
is a hint of arrogance in that answer, but there we are. The Bank
of England Financial Stability Report, October 2007, says that
it is unclear whether the ultimate bearers of risk have sufficient
information of an underlying credit risk in the product, in particular,
the more complex instrument in which they invest, and investors
may have become over-dependent on rating agencies' assessments
of risk and also could have misinterpreted ratings, assuming that
they provide information on a range of risk, such as liquidity
and market risk in addition to credit risk. Do you agree with
the Bank of England's statement there?
Mr Bell: We have always been very
clear as to the nature of our ratings.
Q1137 Chairman: I am asking the question:
do you agree with the Bank of England's statement here?
Mr Bell: We believe that certainly
some investors. We do not believe that the investors misunderstood
the rating, i.e. we do not think that investors actually believe
that a rating was trying to encapsulate a price or liquidity component.
However, we think that, in the absence of any other indicators,
undoubtedly a number of investors used the rating as a proxy for
liquidity or pricing components.
Q1138 Chairman: So the Bank of England
are on to something here then.
Mr Bell: I think, yes, but I do
not think it is a misunderstanding of the rating. I think this
is "we used the rating for another purpose because we did
not have the other tools, so we thought this was as close as we
Q1139 Chairman: Do you disagree when
the Bank of England say that investors may have become over-dependent
on the ratings agencies' assessment of risk?
Mr Bell: That is entirely possible.
We have never advocated that investors should buy