While Standard & Poor's agrees that investors should consider a variety of factors, including their own analysis, and not make decisions solely based on credit ratings (“Credit-rating downgrade,” Feb. 18), we strongly disagree with the suggestion that S&P's ratings are or were influenced by conflicts of interest or that “lack of transparency prevails” in the issuer-pays compensation model.
S&P and the vast majority of credit-rating agencies have employed the issuer-pays model since the 1970s, when the Penn Central Railroad bankruptcy demonstrated the need for greater transparency in credit ratings.
The issuer-pays model is unique in its transparency compared with the alternative subscriber-pays or government-sponsored models. Ratings in a subscriber-pays model are selectively disclosed only to the firms that can afford the subscription, and are also vulnerable to influence by the subscriber. Markets have questioned whether a government-sponsored model could deliver truly independent ratings on sovereigns, local governments or politically important corporates.
By contrast, the issuer-pays model enables ratings to be made widely available to the public, free of charge. This fosters more efficient debt markets, public scrutiny and coverage of emerging companies. Indeed, one rating agency recently changed from subscriber-pays to issuer-pays.
S&P employs rigorous procedures that protect the integrity of ratings. Many other professions successfully manage similar issues. Newspaper and magazine publishers sell advertising space to the same organizations on which they report — just as rating agencies receive fees from the issuers whose credit instruments they rate. This doesn't mean the opinions expressed are not independent.
S&P has long had strict policies that ensure the independence of our analytical processes. The Dodd-Frank Act further strengthened rating agency accountability, transparency and oversight, and there is now an SEC Office of Credit Ratings that oversees the rating agencies, conducts an annual exam of each agency and issues a public report.
Public disclosure of our ratings to a broad audience of market participants means our opinions are subjected to market scrutiny every day from every corner of the capital markets.
S&P has acknowledged that the performance of ratings of certain U.S. residential mortgage-related securities issued in 2007 has fallen short of our broader track record, which we deeply regret. In the first half of 2007, we and virtually all government officials and market participants failed to predict and fully appreciate the speed, severity and prolonged impact of the U.S. housing crisis. In other business sectors and geographies where the same issuer-pays business model applies, including in other structured finance segments, Standard & Poor's ratings held up well in the crisis.
Executive managing director,
Global Analytics and Operations
Standard & Poor's Ratings Services