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Jill E. Fisch
Professor of Law at University of Pennsylvania Law School and expert in the intersection of business and law, including the role of regulation and litigation in addressing limitations in the disciplinary power of the capital markets
Following the interview with Professor of New York University, Lawrence White, Dukascopy has interviewed another expert in the area of financial markets and regulation, Professor of Law at University of Pennsylvania Law School, Jill Fisch, who shared her view on the rating agencies and their role, as well as accountability for the financial crisis of 2008.
1) What is your assessment of the current agencies' behaviour?
I think that now agencies are still ineffective. In my view they are responding to the fear of regulation and perceived political pressure. They have been very successful in lobbying and trying to forestall any kind of meaningful regulation and I think that their credibility remains up in the air.
2) Do you agree that the rating agencies missed the financial crisis of 2008?
I assume that you imply that they failed to predict it. One thing is the rating of the securitized instruments and there I think were some problems with the way they evaluated those instruments. The instruments are relatively new, the model and the assumptions they have used in the past did not translate readily.
In hindsight, they made a lot of mistakes about how risky those instruments were, that then translated into inaccurate ratings for the firms that held such instruments. Obviously, the firm that had long positions in those securities was under a bigger risk.
I would say that the statement that they have missed the financial crisis is a mischaracterization. In my opinion, the rating agencies were flawed with respect to those particular instruments and the concentration of those instruments in the financial industry had a ripple effect that I am not sure the rating agencies could have predicted.
3) Do you consider that there should be more competition in the rating agencies' business sector?
Until Fitch emerged as a third competitor, there were only two rating agencies. S&P and Moody's were the only ones for years and years. But I think the argument that we need more competition is a little bit misguided. More competition is not necessarily a good thing. In some way the entry of Fitch allowed issuers to shop one rating agency against another for the best rating.
I certainly do not see the "opening of new doors" to the new rating agencies as particularly helpful. It is also unclear how useful it is having multiple agencies, given that you cannot really compare the ratings, although the whole point of ratings is to have some standardization. It means that an investor who has to rely on a rating agency, who cannot do the work himself/herself, would have to waste time comparing an A rating given by one rating agency to an A rating from another agency, which, certainly, does not add any convenience to the investor.