6 February 2013

Nigeria: Ratings Agencies' Credibility Takes a Bashing As U.S. Sues S&P

The United States government Tuesday sued Standard & Poor's (S&P) for its assessment of the sub-prime mortgage debts that fuelled the 2008 financial crisis.

The government is seeking $5 billion in its civil lawsuit, accusing the ratings service of defrauding investors.

The 119-page lawsuit, filed in Los Angeles, is the first from the government against a ratings agency, a sector that has generally shielded itself from liability by citing First Amendment protection of free speech.

Sixteen states and the District of Columbia are also suing S&P, a unit of the McGraw-Hill Companies Inc.

Last November, S&P had assigned a stable outlook on the Nigerian economy, raising its Long-Term Foreign and Local Currency Sovereign Credit ratings on Nigeria to "BB-" from B+.

According to reports in the New York Times, the lawsuit by the US government was brought after settlement talks between the US Justice Department and S&P broke down last week.

The talks collapsed over the federal authorities' insistence on a settlement involving at least $1 billion.

If S&P is eventually found to have committed civil violations, the firm could be fined and its business regulated.

Reacting to the lawsuit, a Senior Analysts at BGL Securities Limited, Mr. Femi Ademola, welcomed the decision by the US government, saying, "A lot of people have been complaining about the work of ratings agencies."

He added: "Everybody is already skeptical about what ratings agencies do. But the question is, can we do without them? The answer is no, and this is because the rules governing bonds and other securities trading around the world requires that such instruments must be rated by these agencies."

According to Ademola, the legal action would also make ratings agencies improve on their work, saying that there had been complaints of conflict of interest and the moral hazard of having to pay the agencies for their ratings.

He however said the suit was not going to affect sovereign ratings by the agency.

When contacted on the development, London-based Emerging Markets Strategist at Standard Bank Plc, Mr. Samir Gadio told THISDAY "the development will probably be controversial and make big headlines in the media, although the actual market implications are likely to be limited."

Gadio said: "It is not breaking news that the ratings agencies failed to properly assess the increasing risks in the financial system ahead of the 2008 crisis. Besides, the regulators and policy makers were also unable to take the necessarily steps to prevent the bubble."

He added: "As such, we don't expect any meaningful impact on Nigeria and her ratings. In an environment marked by exceptionally loose global monetary policies, it is likely the Nigerian market will continue to attract large capital inflows.

"It is worth noting that even when Standard and Poor's downgraded Nigeria to B+ a few years ago, Guaranty Trust Bank and First Bank of Nigeria's international bonds barely reacted, suggesting Eurobonds are much more sensitive to the global liquidity cycle rather than ratings or even domestic macroeconomic metrics."

The Managing Director/Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane also agreed that the development would not affect Nigeria's sovereign ratings.

He explained: "The subprime mortgages were just an area. You can't just say because a pediatrician made a mistake, then all doctors are bad."

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