Rating agencies not very useful: PIMCO's Gross
The big rating agencies are no longer very useful to investment companies such as the world's biggest bond fund manager PIMCO, which can be nimbler in anticipating shifts in the credit quality of debt, the company said on Wednesday.
Analysts have blamed rating companies, such as Standard & Poor's, Moody's Investors Service and Fitch Ratings for contributing to the financial crisis by assigning top ratings to securities linked to mortgages.
The credit rating agencies no longer serve a valid purpose for investment companies free of regulatory mandates, wrote Pacific Investment Management Co.'s managing director Bill Gross in a May Investment Outlook on the company's Web site.
Their warnings were more than tardy when it came to the Enrons and the Worldcoms of ten years past, and most recently their blind faith in sovereign solvency has led to egregious excess in Greece and their southern neighbors, Gross wrote.
In recent months as heavily debt-laden Greece has been punished in the debt markets and bond investors' fears have started to spread to some other European countries, the agencies' sovereign ratings have come under closer scrutiny from investors.
The big three rating agencies can be timid and slow to downgrade sovereigns, Gross added, citing Standard & Poor's recent one-notch downgrade of Spain as an example.
On April 28, S&P cut Spain's rating one notch on the economic view.
S&P just this past week downgraded Spain one notch to AA from AA+, cautioning that they could face another downgrade if they weren't careful...And believe it or not, Moody's and Fitch still have them as AAAs, Gross wrote.
Spain has 20 percent unemployment and a recent current account deficit of 10 percent, Gross said, adding that its government bonds are already trading as if they were rated at Baa levels; in the lower echelons of investment grade.
In late April, Mohamed El-Erian, chief executive of PIMCO said the company had been quick to reduce its exposure to Greek, Portuguese and Spanish debt on account of our concerns about deteriorating public finances.
El-Erian then added that PIMCO stayed on the sideline and did not participate in any of the recent bond offerings by these countries.
Despite his criticisms, Gross, who manages the PIMCO Total Return Fund, the world's biggest bond fund with assets under management of some $220 billion, acknowledged that the big rating agencies are necessary for some investors.
I come not to bury the rating services, but to dismiss them. To tell the truth, they can't really die -- they serve a necessary and even productive purpose when properly managed and more tightly regulated. A certain portion of the investment world will always need them to justify the quality of their portfolios, according to the law, Gross wrote.
The U.S. Securities and Exchange Commission designated the three rating agencies as Nationally Recognized Statistical Ratings Organizations in 1975. That meant regulated financial institutions such as banks, insurance companies and pension funds would be guided by the agencies ratings, he wrote.
However, the rating agencies services are overpriced as well as subject to the influence of the issuer, which in turn muddles their minds and clouds their judgment, Gross wrote.
In November, a regulatory group, the National Association of Insurance Commissioners, said it hired PIMCO to develop a model to determine risk on 18,000 residential mortgage-backed securities held by the nation's insurers, in a bid to improve on traditional bond ratings.
(Additional reporting by Jennifer Ablan, Walden Siew and Al Yoon)
(Editing by Theodore d'Afflisio)
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