Credit ratings agencies still under fire for their role in the GFC. Here's the Herald with the latest thoughts.

The essential conflict many of these agencies face is described here:

Critics want the cosy club inhabited by the three big credit ratings agencies to be replaced by a system with more accountability to investors, and less crippling conflicts of interest.

So what can be done to fix the credit rating agencies, seen by many as the unsung villains of the crisis?

Some suggestions include holding the firms responsible for their opinions in the courts, breaking up the oligopoly, and cutting investors' reliance on ratings. None is foolproof but each attempts to address the conflict of interest that was brutally exposed by the credit crisis.

A credit rating from one of the big three firms is virtually indispensable for companies looking to raise debt on the market. But it is now clear the incentives in the current system were skewed to encourage agencies to provide as many ratings as possible, at the expense of good advice.

For decades issuers have paid for the ratings because they need them most, and it has been in the agencies' interest to approve as many ratings as possible. However, the Bank for International Settlements says growth in structured finance - complex bundles of corporate debt - created huge systemic risks for this arrangement.

Toxic assets & increased transparency

Kenneth Scott and John Taylor argue in the WSJ that mandated disclosure is needed to help address the (still ongoing) issue of getting so-called "toxic assets" off bank balance sheets.

It's a(nother) good little summary of (part of) the problem, and how regulation is attempting to address the issue.

The Dot Com crash case study

Next week in class we're looking at the Dot Com crash. One of the things to think about: is there any parallel between that and the sub-prime 'meltdown' that led to the "Global Financial Crisis"? While you're thinking about that, here's a video of Emeritus Professor Sidney Winter, the Michael Crouch Visiting Professor in Innovation and Entrepreneurship at the Australian School of Business, in conversation with renowned US economist Dr Alice Rivlin.



If you can't see the video, click through here.

Credit ratings agencies (finally) facing the music?

Adele Ferguson in the Australian highlights some of the upcoming legal proceedings involving the credit ratings agencies, particularly with respect to the 'sub-prime' mortgage backed securities. Not too soon, either.

Here's the start:

THE spotlight is about to return to the culpability of credit ratings agencies in the global financial crisis following a decision by the biggest pension fund in the US to sue over "wildly inaccurate" ratings on the $US600 billion ($750bn) of synthetic derivatives sold to investors.

This, coupled with a court case to be heard in NSW Federal Court this week, could open the floodgates for third-party litigation against the credit rating agencies. It should also corral the regulators into finally doing something about the so-called independence and enormous power of agencies such as Moody's Investors Service and Standard & Poor's.

From the comments below - a link to a guest lecture by Brad Walters, General Manager, Financial Analytics, Corporate Scorecard held at the Australian School of Business, UNSW:

CEO compensation - here come the $$s

Looks like the GFC isn't hurting the bankers too hard, over in the U.S at least. The Wall Street Journal has the details. Well sort of, you only get the highlights of the article unless you are a subscriber.

Meanwhile, back in Australia, investors are told to keep an eye on executive pay. Quite rightly, too! Mirriam Steffens in the SMH with the details.

Banks and mark to market

Here we (finally) have a defense of mark-to-market accounting - in The Economist.

Key graphs:

Standard-setters should defuse the argument by making clear that their job is not to regulate banks but to force them to reveal information. The banks, their capital-adequacy regulators and politicians seem to dream of a single, grown-up version of the truth, which enhances financial stability. Investors and accountants, however, think all valuations are subjective, doubt managers’ motives and judge that market prices are the least-bad option. They are right. A bank’s solvency is a matter of judgment for its regulators and for investors, not whatever a piece of paper signed by its auditors says it is. Accounts can inform that decision, but not make it.

Buffet on mark to market accounting

Warren Buffet offers his thoughts on accounting and the GFC. WSJ link here

Now comes Warren Buffett, a big investor in Wells Fargo, M&T Bank and several other banks, who, during his marathon appearance on CNBC Monday, clearly called for suspension of mark-to-market accounting for regulatory capital purposes.

We add the italics for the benefit of a House hearing tomorrow on this very issue. Mark-to-market accounting is fine for disclosure purposes, because investors are not required to take actions based on it. It's not so fine for regulatory purposes. It doesn't just inform but can dictate actions that make no sense in the circumstances. Banks can be forced to raise capital when capital is unavailable or unduly expensive; regulators can be forced to treat banks as insolvent though their assets continue to perform.

More reform pushes for credit rating agencies

And they need it, too. Though to say that they 'caused' the GFC is attributing a bit too much blame, I think.

Richard Glayas in the Oz.

GFC - what can we learn / teach?

How do we learn from the GFC (TM)? Here's what a few business school deans think.

Bank provisioning

One way that banks respond to changes in economic circumstances is via the level of provisioning. It's been interesting to see how the Australian banks have adjusted their level of provisioning in response to the Global Financial Crisis (TM). Here's an article by Richard Gluyas in The Oz focusing on the Commonwealth Bank.

Key graf:

But not only that, Mr Williams said CBA's provisioning coverage was "lacking" compared to its peers. Total provisions as a proportion of risk-weighted assets was only 0.77 per cent, compared to 1.27 per cent for ANZ, 1.11 per cent for Westpac and 0.86 per cent for NAB. "Should, as we anticipate, the environment continues to deteriorate, this will likely result in higher provisioning charges in the near term," Mr Williams said. The bar had been lifted on capital adequacy, Citi said, and CBA was at risk of "not measuring up".