US: Credit Market

Moody's President Sees Unprecedented Illiquidity


The credit market is experiencing an unprecedented loss of confidence due to the lack of transparency over where exposures lie rather than underlying credit quality problems, Moody's Investors Service President Brian Clarkson said on Thursday.

"I've been in the marketplace for 20 years ... what we're experiencing is an extreme lack of confidence and lack of liquidity. I have never seen this before," Clarkson told Reuters in an interview. "A lot of it has to do with transparency: it's not clear who owns what."

There are also questions over valuations of illiquid securities, he said, although not necessarily from a credit standpoint. Some structured vehicles -- such as the Cheyne Finance fund run by British hedge fund Cheyne Capital Management -- have been forced to sell assets due to losses even though the securities they hold have not been downgraded.

"It's not that a lot of the things people are holding aren't money good, they are. If you hold them to maturity they will pay interest and principal on a timely basis."

Ratings agencies have come under fire for not being quick enough to react to the problems in the U.S. subprime mortgage market that have roiled equity and credit markets in July and August.

In recent months they have downgraded hundreds of securities as mortgage defaults have proved higher than expected. That has led to widespread falls in prices for asset-backed securities whether linked to subprime or not as investors have shunned risky structures.

The European Commission said in August it will review the voluntary code used by the agencies, and French President Nicolas Sarkozy said questions should be asked about the role of ratings agencies in the latest crisis.

Too Quick and Too Slow

Clarkson, who before being appointed as president early in August was responsible for overseeing global structured finance among other areas, said Moody's had also been criticised by some investors for acting too quickly.

"If you're a buy and hold investor, we acted way too quick. If you're holding that thing to maturity, you don't want a downgrade," he said. "If you're a mark-to-market investor, or in particular if you've shorted the market or shorted particular securities, we acted way too slow."

He said it was wrong to treat all subprime mortgage deals alike, with some issuers performing in line with expectations.

"You'll hear that subprime mortgages are a disaster, a meltdown, it's terrible. There will be significant losses, there's no doubt about that," Clarkson said. "(But) the way we view our role in the market post assigning the ratings is to make sure we're providing the market with as much information as possible on an ongoing basis. And the observation is that it's not the entire market."

Clarkson said that Moody's wanted to work with regulators to avoid being put in a position of having to provide a service that it was unable to do.

"A rating is an opinion. It's not a promise, not a guarantee. It's also not static," he said.

Calls to revamp the business model of the rating agencies, for instance, by making investors rather than issuers pay for ratings may not help.

"Regardless of who pays, there's always a conflict," he said. For instance, if an investor pays for a rating, and that rating then has to be downgraded, there is potential for conflict there. "Any time there is money involved, there is potential for conflict."

He said that criticism suggesting that Moody's was involved in structuring securitisations was not accurate. "We make it a point not to be structuring transactions," Clarkson said.

"We make everything as transparent as we possibly can. Our ratings process is transparent. The ratings are not assigned by the analyst, they're assigned by committees. Our ratings record is out there for everyone to take a look at. Historically, the ratings have held up extremely well."