Come time to blame, remember this lot ...

Oct 2 2008 by Peter Jackson, The Journal

WE are now reaching that part of the financial crisis which invariably follows the initial shock of failed banks and collapsing markets.

It’s the phase called the blame game.

And no less a figure than the Archbishop of York has leapt in and offered his two pennyworth. That sage of the markets, who bestrides the financial world like a colossus, has pinned the blame on those who have been selling banking stock short, both driving down the price and the banks out of business.

Not to be outdone, the Archbishop of Canterbury will have no such mealy-mouthed limitation on guilt, but has blamed capitalism itself.

Perhaps they are both right and, when the solids have stopped hitting the fan I’m sure a lot of people will be left less than spotless. Mohamed Al Fayed will, no doubt, blame the Duke of Edinburgh.

Interestingly, not many people are yet blaming the ratings agencies, those international bodies which, as their name implies, rate debt instruments and debt issuing institutions according to their credit worthiness.

For some time observers have been aware of problems with the agencies and were issuing warnings about they way in which they were operating. When Enron, for example, went bust in 2001, its auditors Arthur Andersen received much of the blame while the ratings agencies got off lightly, even though they had rated the stock at investment grade just four days before it went bankrupt, despite the fact they had been aware of the company’s problems for months.

The relevance of this to the present crisis is that the agencies did not get their house in order and, as with Enron, their ratings did not reflect the underlying weaknesses of institutions such as Northern Rock and Lehmans.

More damning is the charge that, under pressure from Wall Street investment houses, they issued ratings to the very sub-prime mortgage instruments that have had such a toxic effect on the world’s banking system.

A large part of the problem is that the agencies have been too close to the companies they rate and whose debts they rate and, unbelievable though it is, they actually charge debt issuers for the ratings they issue, so those they judge are their paymasters.

When the dust settles and reforms are framed, don’t forget the ratings agencies.