Standard & Poor's

Dagong to create new ratings agency with Russian and US partners

The company is joining forces with Russian and US partners to create a new ratings agency that would have its own standards for credit scoring

PUBLISHED : Tuesday, 25 June, 2013, 3:21pm
UPDATED : Wednesday, 26 June, 2013, 4:08am


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Already under fire for their role in the subprime crisis, Fitch, Moody's and Standard & Poor's (S&P) are now in the sights of Dagong Global Credit Rating, which has formed a joint-venture agency with Russian and US partners.

Universal Credit Rating Group is being funded to the tune of US$300 million from Dagong, RusRating and Egan-Jones and is seeking backers from emerging markets.

Dagong chairman Guan Jianzhong told the Post the new firm was focusing on creating a new global standard and promoting a "dual rating model".

He said Universal would have its unique rating system, while retaining access to the rating systems of the three main backers.

Dagong was founded in 1994 as a Chinese-based alternative in a rating services sector dominated by US agencies. Guan reportedly played a key role in establishing a strategic partnership with Moody's in 1999, when the US firm signed a three-year deal to provide training for Dagong.

In the joint venture's first phase, Universal would focus on setting up its corporate structure and a rating methodology that could be applied to firms with differing accounting systems.

Universal had three board members and was starting with a blank sheet of paper, Guan said.

The agency hoped to benefit from reform of global capital markets at a time when the credibility of the Big Three credit rating firms was under attack, he said.

The Big Three now provide the benchmarks for the global rating system. However, they have come under fire for issuing top-quality ratings to low-quality collateralised debt securities in the run-up to the global financial crisis.

The subsequent meltdown highlighted grossly misleading ratings from the Big Three, with some critics accusing them of bowing to pressure from big banks who were anxious for the top rating so they could bundle subprime mortgages into securitised packages and sell them to institutional investors, many of whom sold the products on to an unsuspecting public.

Critics have said potential conflicts of interest exist with private agencies, which are paid to assign the ratings. They also question the impartiality of the Big Three, saying their priority is to maximise shareholder value.

Separately, Bloomberg reported yesterday that the US Department of Justice had said it was seeking more than US$5 billion in penalties from S&P over its ratings of residential securities.

S&P is accused of deceiving investors, including federally insured financial institutions, by giving its highest credit ratings to mortgage-backed securities and collateralised debt obligations because it wanted to gain business from the issuers of the securities and not because the securities merited these ratings.