Rating agencies part of banking crisis: investors

By Emily Chasan and Jennifer Ablan

NEW YORK (Reuters) - The reactions of ratings agencies to sharply falling stock prices and widening credit default swaps have been one of the key problems in the past few months as short-sellers targeted financial firms, two investors who specialize in distressed assets said this week.

Regulators in the United States, Britain, Canada and Germany are blaming short-sellers for the rapid declines in the share prices of major banks and have imposed unprecedented temporary bans on the short-selling of financial shares as they seek to head off what is threatening to be the worst financial turmoil since the Great Depression.

However, some say their target is misguided.

Financier Wilbur Ross, who is known for rescuing troubled companies, asserts that short-sellers have played an indirect role in the current crisis as rating agencies increasingly rely on stock prices and credit default swaps to come up with companies' credit ratings.

"Of late the rating agencies ... seem to be looking at stock prices and the credit default swaps as a guide to what their ratings should be," Ross told the Reuters Restructuring Summit this week.

"To the degree they do that it makes you wonder if you even need the rating agencies any more," he added, since the prices of the stock and credit default swaps are already public information.

Andrew Feltus, senior vice president and portfolio manager at Pioneer Investments, also said rating agencies should share the same scrutiny as hedge funds.

"You've had a dynamic now where people just short, short, and short and it drives down the (stock) price," Feltus said. "Then the rating agencies say, 'There's something going wrong here, the stock's falling, I better downgrade.'"

That triggers a series of events where financial firms have to post more collateral to obtain credit to keep running, and essentially pushes the companies out of business, Feltus said.

In a short sale, investors borrow shares and sell them, betting that the stock price will fall. The goal is to buy the shares back at a lower price, allowing the investor to return the shares to the broker while taking a profit on the spread between the original sale price and the cost of buying back the shares.

For institutional investors trading in hundreds of thousands or millions of shares, the short sales of Fannie Mae, Freddie Mac, or Lehman Brothers in the last year as their shares have fallen precipitously could have resulted in huge profits.

S&P, MOODY'S SAY NOT SO FAST

Standard & Poor's, a unit of McGraw-Hill Cos Inc (MHP.N), said the price fluctuation in a company's securities is just one barometer that figures in their ratings, but it is not the determining factor.

Spokeswoman Mimi Barker said S&P looks at a number of factors to help the firm gauge an issuer's ability to raise additional capital, including dramatic movements in credit default swap spreads and stock prices.

"The markets are very fluid, but those movements alone do not determine a ratings action," Barker said. "S&P takes the ratings actions as appropriate, based on the qualitative and quantitative factors that are important to the rating and without any outside influence."