LETTERS TO THE EDITOR
By Janet Tavakoli
Financial Times Published: December 29, 2003

Sir, I agree with Francois Veverka, Executive Managing Director, Standard and Poor’s, (Letters, December 24) that it is unfair to expect rating agencies to unearth fraud. Rating agencies have made it abundantly clear they will not perform due diligence for investors. Rating agencies take documentation at face value, and earn margins for ratings of 40-50 per cent.

I must disagree, however, with Fitch’s statement that “credit ratings bring greater transparency” (“Agencies under fresh pressure on rating worth”, December 23). As Alan Greenspan, the Fed chairman, pointed out, disclosure is not the same thing as transparency. It is not the rating agencies who “carry responsibility for sheer gullibility”. Rather investors and lending banks are gullible if they rely on ratings as an indicator of financial robustness, particularly when rated entities engage in structured finance.

S&P’s ratings of Hollywood Funding Nos. 4, 5, and 6 leap to mind. S&P said it believed defenses to payment on the credit enhancement policies had been waived. Despite this, S&P downgraded the deals from AAA to BB after receivables from movie projects never materialized, and credit enhancement providers raised fraud as defense to payment. S&P’s ten notch downgrade of Parmalat is merely a more recent example.

Ratings are only evidence that steps were taken to evaluate cash flows from public documents. An investor should never rely on a rating as assurance that documentation is in order. Rating agencies don’t take losses, investors do.

Janet Tavakoli
President,
Tavakoli Structured Finance,
Chicago, IL 60601, USA

See also: “Tavakoli Structured Finance Revokes the Credit Rating Agencies’ NRSRO Designation“