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Have some sympathy for poor rating-agency staff

WHEN I was a young boy, I wanted to be a cowboy when I grew up. The idea of riding around on my horse shooting the baddies appealed to me. Sometimes I wanted to be a train driver or an astronaut.

But as I got older, my dreams changed and eventually I wanted to work in the capital markets as a credit analyst. Or at least that's what I tell myself.

And however sad that might be, I console myself by saying that it could be worse. I could be an analyst at a rating agency.

While working for an investment bank is regarded by polite society at the moment as somewhere between being a 'News of the World' journalist and an estate agent, can you imagine what it must be like when you tell people that you work for Moody's or S&P?

The agencies are generally regarded as having been at the heart of the financial meltdown, with their massive number of AAA ratings for all kinds of weird and wonderful structured products. But it is not as if the agencies were particularly loved even before this.

Of course, they cannot possibly please all of the people all of the time -- or even some of it. They will always tend to be behind the market and they only ever offer opinions.

Yet somehow over the years, they have ingrained themselves into the very DNA of the system such that for all the angst and criticism they are still here and playing a central role.

That leads to problems. One is that they are so involved that they are often treated as if they are (or should be) like some benevolent uncle, dispensing advice and wisdom in a cheery, non-judgmental manner. What sometimes seems to be forgotten is that they are limited companies whose raison d'être is to make money.

Anyhow, on an individual basis, the employees of a rating agency are exactly the same as you and I -- just with an extra head. Indeed, I have met many charming, intelligent representatives of that industry over the years. And I come here today not to bury the agencies, but to praise them -- or at least to evoke a little bit of sympathy for them.

While it could be argued that the agencies have bought some of their problems upon themselves, the fact that they are so heavily used by the financial system means that they often carry a heavy responsibility on their shoulders.

They should, of course, be the independent arbiters of credit quality and not be swayed by traders, corporate financiers, politicians or bankers. But it cannot be an easy job when, as has been the case recently with regard to the European sovereigns, your decisions -- if acted upon -- could lead to the destruction of an entire economy.

It has been clear that since the European sovereign crisis started, some politicians and EU officials have tried to blame the rating agencies for reducing ratings, thus making it more difficult for some sovereigns to borrow. This week was no exception.

But while the financial crisis of 2008 could partially be laid at the doors of the agencies, it is difficult to blame them for the complete lack of fiscal discipline demonstrated by EU members over the past decade.

The problem is too much debt, not the agencies belatedly recognising this fact. But authorities have got the agencies in their sights and are trying to put pressure on them via regulation.

The body responsible is the European Securities and Markets Authority and if you want a good laugh, I suggest you go to its website and view "ESMA: regulating the rating agencies."

It's nice to know, by the way, that ESMA is based "just a stone's throw from the Champs Elysees" as I presume that is an expensive piece of real estate.

If ESMA really wants to improve the rating process (and it does state that its existence will "ensure the quality of ratings") and introduce more competition and transparency, then that's fine.

However, one can't help but feel that the intent to ensure "more transparency of sovereign ratings" is really an attempt to control the agencies -- especially when you read Regulation 513/2011 (look it up).

Taking all this into account, working in a rating agency right now must be hard work. Not that I would rather be at ESMA. One thing that the latter is very proud of is its ability to carry out "site inspections".

Can you imagine how exciting that job must be? Turning up at a rating-agency office at dawn, wandering around between the desks, looking at loads of people working silently in front of computers.

Oh, the thrill of it. Not my dream job. I am still waiting for that one, when the EU starts up its very own rating agency specialising in sovereign debt and I get to sit on a beach for most of the year, occasionally confirming that all European sovereigns are AAA with a stable outlook. Just a different kind of cowboy, I guess.

Gary Jenkins is head of fixed income at Evolution Securities.

This article was first published in EuroWeek, July 8 2011.

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