This week I’d like to coddiwomple through making mistakes and staying data-dependent to gain a...
Chinese credit rating company lets S&P, Moody's, and Fitch have it right between the AAA
07/22/2010 11:42 am EST
Absolutely true, of course. Standard & Poor’s, Moody’s, and Fitch Ratings, the big three U.S. credit rating companies, failed miserably during the run up to the financial crisis, giving AAA-ratings to packages of securitized debt that went belly up in short order. And there’s good reason to believe that the companies aren’t downgrading the sovereign debt of countries such as the United Kingdom and the United States now for political reasons.
But Guan Jianzhong’s comments reveal the real problem of finding a solution to the problem. He’s the head of Dagong Global Credit Rating, the largest credit rating agency in China. If he’s afraid that Chinese investors and China’s sovereign wealth funds aren’t getting good information from Western credit rating companies on Western debt, investors have just as much reason to worry about politicized, high ideological credit quality opinions coming out of Dagong Global Credit.
Certainly the sovereign debt ratings Dagong Global Credit issued yesterday did nothing to assuage that worry. China ranks above the United States, the United Kingdom, Japan, and France, according to Dagong Global Credit. Given what little we know of the huge bad loans at China’s state-controlled banks and the $1.7 trillion in loans backed by local governments that kind of blanket endorsement of China’s credit quality seems, well, political and ideological.
Dagong Global Credit is a private company founded in 1994 with about 25% of the Chinese market for credit rating. Most of the rest of that market belongs to S&P, Moody’s, and Fitch. It doesn’t make Dagong Global Credit’s criticism less valid to say that the company would love to see investors and institutions move some of the market share now owned by S&P, Moody’s and Fitch in its direction. But criticizing those companies for bias does indeed help Dagong’s business prospects.
I’m not sure that I’d trust Dagong Global Credit on sovereign debt ratings any more than I would S&P, Moody’s, and Fitch. But I’m not sure if I’d trust any company to issue ratings that weren’t politicized or highly ideological.
A pox on all their houses, I say. Let them all compete. Let more companies into the business in the United States. Let them issue conflicting ratings. And let investors figure it out. Better than the blind trust in ratings that let Wall Street sell so many truly terrible products in the run up to the financial crisis.
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