Ratings agency Standard &
Poor's will Friday defend its positive assessment of some products that
collapsed ahead of the global economic crisis as "entirely reasonable",
according to a trial document.
Ratings agency Standard & Poor's will Friday
defend its positive assessment of some products that collapsed ahead of the
global economic crisis as "entirely reasonable", according to a trial
document.
The agency is expected to open its case before the Federal
Court of Australia in the first hearing at which one of the big three credit
risk agencies is being held to account for giving top ratings to products that
later crashed, triggering the 2008 financial crisis.
"Rating is an art, not a science," S&P said in
an outline of its opening submissions obtained by AFP.
"There is no one procedure for all ratings and indeed
there is no 'correct' procedure for ratings or even the concept of a 'correct'
or 'right' rating."
The 13 Australian towns that are suing S&P lost Aus$15
million (US$14.3 million at current rates) after investing in Constant
Proportion Debt Obligation notes (CPDOs) or "Rembrandts".
They accuse S&P of "significant errors" in
giving the notes a top-notch triple-A rating.
But in its outline, the ratings agency said the process it
took in assessing the products concerned was "rigorous and entirely
reasonable".
"It was also entirely reasonable for the (ratings)
Committee in each instance to form an opinion that 'AAA' was an appropriate
rating," it said in the 32-page document dated September 30, which it
stressed was not a comprehensive statement.
The agency said any rating was an opinion about possible
future events and "not a statement of fact" and the assignment of a
"AAA" did not mean that S&P had determined that instrument would
not default.
"Indeed, no one can make that sort of determination
about events in the future," it argued.
"Instead, that rating means that by comparison with
other instruments with lower credit ratings, S&P believes it is less likely
to default than those other instruments."
S&P said it expressly warned its users about the limited
nature of ratings, adding that what eventually happened in the market during
the global financial crisis -- and what eventually led CPDOs as a group to fail
-- was unprecedented in history.
It denied the assertions that S&P did not have its own
internal model with which to assess the complicated financial products or
relied heavily on the Rembrandts' creator, RBS subsidiary ABN AMRO, in its
rating process.
And it said no statement made by S&P was false or
materially misleading.
The councils were sold the notes by Australian firm Local
Government Financial Service in late 2006, assured they had a less than one
percent chance of failing. Within two years the synthetic derivatives had
crashed.
S&P and ABN AMRO are both contesting the case, and have
also filed counter-suits against one another.
Source : AFP
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