Column : Unrating a crisis

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As the baroque complexity that is structured finance unwinds, some of those people who, if they had done their jobs as envisioned, could have contained the crisis are getting a lot of attention—the big brokerage firms, the boards of overexposed pension funds, risk-loving upper management. One crucial set, however, seems to be escaping such attention: credit rating agencies (CRAs).

That is doubly odd when one remembers the Enron saga. As Enron’s “creativity” with its balancesheet blew up in its face, attention justifiably shifted to their accountants at Arthur Andersen, who had not responded to the problem in time; Andersen, while still nominally in business, has never recovered.

Have CRAs been hit half as hard? No. True, a few months ago the SEC said that they had done a bad job rating complex investment vehicles, and announced new rules reducing funds’ reliance on them. The CRAs didn’t raise a fuss—because the funds, with Vanguard in the vanguard, were perfectly willing to raise it for them.

How did the CRAs screw up? In the 1970s, they shifted from charging buyers of their ratings to charging the firms they were rating. (This was simultaneous with, and probably caused by, US regulators’ making their function quasi-official.) That may be okay when hundreds of corporations are coming to you to rate their debt. When, however, their business changed and they started having to rate collaterised debt obligations (CDOs) for a small group of giant broker-dealers—like Lehman or Merrill—it is difficult to deny the incentives to cozy up to the major source of your income.