Rating agencies must sharpen up (Editorial)

Credit rating agencies - which give their opinions on companies and investment instruments, helping rated institutions seek better deals in securing debt and investment - need to get their act together if they are to regain investor confidence.

They have been accused, on a number of occasions, of giving inflated ratings on risky debt instruments as well as on financial institutions, helping these institutions secure credit against risky mortgages. This trend has damaged the reputation of some rating agencies.

A US district judge on Wednesday rejected efforts by Moody's Investors Service and Standard and Poor's to seek dismissal of a fraud lawsuit. Abu Dhabi Commercial Bank (ADCB) last year filed a class action suit against the agencies, accusing them of issuing false and misleading statements about notes backed by subprime mortgages and other debts. ADCB last year had to make provision for losses to the tune of nearly half a billion dirhams as a result of purchasing the notes.

Negligence on the part of ratings agencies could have catastrophic consequences for financial institutions. There is an obvious need for increased regulation.END