It was the regulators that initiated the fetishisation of the credit rating agencies
Sir Paul J. Davies in “The false of security at the heart of the credit crunch” September 19 relates how Peter Fisher, a former undersecretary for domestic finance at the US Treasury explains that it was the financial systems extreme “reliance on the supremacy of secured asset based lending” or the “fetishisation of collateral” that made a necessity out of the credit ratings agencies, because a “credit rating is the bare minimum that can be taken in lieu of any real inquiry into a borrower’s cash flow”.
Absolutely not! First, there is nothing wrong with secured asset based lending if the value or cash flow generated by those assets has been correctly assessed. Second, a credit rating, if done right, should of course include a real inquiry into the borrower’s cash flow. The fetishisation of the credit rating agencies occurred primarily because the regulatory authorities declared the credit ratings so correct that they could be used, for instance, to determine the minimum capital requirements of the banks. And, lets be frank, if the regulators believed that much in the credit rating agencies, how could you really expect stop that kind of blind-faith from permeating the rest of the market?
Absolutely not! First, there is nothing wrong with secured asset based lending if the value or cash flow generated by those assets has been correctly assessed. Second, a credit rating, if done right, should of course include a real inquiry into the borrower’s cash flow. The fetishisation of the credit rating agencies occurred primarily because the regulatory authorities declared the credit ratings so correct that they could be used, for instance, to determine the minimum capital requirements of the banks. And, lets be frank, if the regulators believed that much in the credit rating agencies, how could you really expect stop that kind of blind-faith from permeating the rest of the market?
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