Analyzing the analysts

The rating agencies have been referred to by many in the insurance industry as  “the new regulators” for long enough now that it’s probably time to retire the “new” and change the reference to to “the real regulators” or “the regulators we really care about because of the impact a downgrade can have on our business.”

In light of the impact the rating agencies’ scrutiny can have on companies’ fortunes, it’s interesting to see the rating agencies themselves–those on the bond rating side–under the microscope, a spot they’ve found themselves in the past few months as government officials react to the sub-prime mortgage crisis and, more recently, to the related woes of bond insurers and their potential impact.

As a story in today’s New York Times noted, this isn’t the first time the rating process has been questioned. Events like the 2001 Enron collapse prompted considerable discussion of the quality of the rating agencies’ analysis and the objectivity of their rating process, given that the debt issuers are the ones paying for their ratings.

Both Standard & Poor’s Corp. and Moody’s Investors Service Inc. are clearly trying to address the concern, with both looking at actions they say are meant to strengthen their ratings operations.

Yesterday, S&P announced what it described as “a broad set of actions” it was in the process of implementing, focused on governance, analytics, information and education. Among other things, S&P said it was establishing an ombudsman office to address conflict of interest concerns, and that the company would periodically engage an outside firm to review its compliance and governance processes.

S&P also announced a number of steps aimed at strengthening its analytics, steps intended to increase information transparency and steps aimed at educating the public including the creation of a credit ratings user manual and investor guidelines and broader distribution of its analysis and opinions on the Web and through other media.

Moody’s, too, indicated it’s considering some changes. In the company’s fourth quarter and full-year 2007 earnings release that came out yesterday, Raymond McDaniel, Moody’s chairman and chief executive officer, said the company is responding to the current “credit market dislocations” by providing “more extensive research and credit evaluation tools.”

Mr. McDaniel also said Moody’s is “working closely with market participants on information transparency in order to restore confidence and to support more orderly credit market operations as quickly as possible.”

Of course, Mr. McDaniel also said he expects the current “credit market dislocations” to continue “well into 2008,” an opinion that seems to be widely held, so no matter what they do, the rating agencies might find themselves wearing the bull’s-eye jacket for a while yet.


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