Credit rating agencies - prepare to be frightened

Take a look at this week's Financial Times weekend magazine with an excellent article about credit rating agencies. The best narrative I have come across describing the slippery slope in this case Moody's which took from research based culture to publicly quoted enterprise with short term agenda and focus on bonuses.


Another rather shocking piece of evidence is an announcement by Standard & Poor's on October 20th 2008 announcing that 760 mortgage backed securities issued in 2006/7 and given a range of ratings by S&P have been downgraded to negative (access to this document does require registration with S&P). The document gives a fascinating insight into the sub-prime crisis. The sheer amount of money raised through these asset backed securities is frankly awesome with a number over $1bn. What is frankly unbelievable is the number of these securities which were given AAA status. AAA status is given to very few countries and companies but apparently to many of these sub-prime mortgages.

Are the credit agencies in the clear or is there time in the spotlight yet to come?

Randomness of search uncovers gem

It is indeed fortunate for any economist to bring out a paper in the last month which begins its introduction; "Are credit markets particularly vulnerable to contagion effects..." and which is titled - Contagion in the Credit Default Swap Market. In fact it is based on research carried out in 2005 looking at the case of Ford and General Motors so it is the result of lengthy research and it so happens that publication date could not be better timed with all the problems of credit default swaps which of course led to the demise of AIG among other casualties.

The paper has come out of CEPII which is the leading French research establishment for the international economy.

The reason for the heading is the randomness of finally finding the piece. An email newsletter from Xerfi, the French economics research organisation, highlighted the work of Michel Aglietta whose work has been out of fashion with its emphasis on the need for greater regulation, but of course is now very much back in fashion, as financial markets move away from self regulation. Michel is an adviser to CEPII an organisation, I had not heard of, but seems an excellent resource on international economies.

Russia starts investor relations society

Russia has just started its own investor relations society highlighting the growing influence and role of the investor relations function within organisations.

I await to see if the investor relations community and financial communications PR function feel that they need to re-examine their role in the financial crisis. So far I sense no soul searching but it is early days. One of the over-riding themes whether sub-prime; credit default swaps; mortgage backed securities; strength of bank balance sheets has been the overall lack of transparency. Does investor relations feel that it has to look at its own role in this process?

You might be interested in a guide in both English and French produced by Observatoire Communication Financiere which brings together Euronext the owner of CAC; investor relations groups and investment analysts as well as the leading financial French legal firm of Bredin Prat .