The Fall of the Rating Agencies, a David and Goliath

June 8, 2010 - PRLog -- Credit ratings from Moody’s, Standard & Poor’s and Fitch Ratings have proven to be unreliable and impossible to measure according to David Einhorn, Chairman of Greenlight Capital, Inc.

“Investors want to know where the high risks are,” Mary Hartman Morris, California Public Employee’s Retirement System (CalPERS).

In testimony to the Financial Crisis Inquiry Commission (FCIC), billionaire investor Warren Buffett admitted getting it wrong in the dot com bubble and getting it wrong in the housing bubble.

In 1993, I.B.M. announced that John F. Akers, its Chairman and CEO, would soon leave. Soon after, a flurry of headline-grabbing departures followed at GM, American Express, Kodak, Westinghouse, Apple Computer and other blue-chip companies.

''It now seems that what we had in 1993 was sporadic and random action by high-profile directors at high-profile companies, but no countrywide improvement in corporate governance,'' Peter C. Clapman, chief counsel of TIAA-CREF (New York Times, Jan 2003).

How often must history repeat itself?  

On Friday April 16, the SEC accused Goldman Sachs of defrauding investors by failing to disclose conflicts of interest in mortgage investments it sold as the housing market was faltering. Goldman shares lost nearly $23 billion in market value in the weeks after the lawsuit was filed.
In early May, the Pittsburgh Post-Gazette reported that pension funds and other investors sued the nation's fourth-largest coal producer and lobbied other shareholders to press for the ouster of the chairman and CEO and three directors at Massey Energy following a deadly mine accident.

The Washington Post recently reported, “A series of internal investigations over the past decade warned senior BP managers that the oil company repeatedly disregarded safety and environmental rules and risked a serious accident if it did not change its ways.  Executives were not held accountable for the failures, and some were promoted,” (Lustgarten & Knutson, June 8, 2010).  

Investors, the public, the environment and even the economy are now paying a hefty price for BP’s lack of integrity, transparency, board accountability, and risk oversight.

To establish a standard baseline for integrity, transparency, board accountability and risk oversight in the marketplace, a startup (http://www.zethics.com) now offers a Corporate Culture Index that allows the markets in a free enterprise system to adequately determine risk rather than relying on credit ratings that have proven to be unreliable and often deceptive.

By introducing a Corporate Culture Index, institutional investors and fund managers have the ability to identify companies with aggressive corporate cultures that discount risk, and to adjust their investment portfolios accordingly to achieve long-term sustainable risk adjusted returns.

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