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Karolus
I discovered econologic
I discovered econologic
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Registration: 14/10/07, 03:09

Rating agencies / conflicts of interest




by Karolus » 14/10/07, 03:23

Hello,

Below is the letter relating to conflicts of interest within rating agencies sent to European parliamentarians of the Committee on Economic and Monetary Affairs by French holders of Russian loans.

These very important conflicts of interest are at the root of the 'sub-prime' crisis in the USA and have devastating consequences both for insolvent mortgage borrowers and for investors, including for example the Russian loan holders.

Sincerely, K1.

Visit www.borrowingsrusses.winnerbb.com
=============================================
To the Committee on Economic Affairs.

Madame President,
Ladies and Gentlemen, Vice-Presidents and members of the Economic Affairs Committee,

In the current market turmoil Commissioner Mc Creevy examines the activities of rating agencies in order to measure their impact on the financial markets. He asked the European Committee of Securities Market Regulators (CESR) to specifically examine areas of potential conflicts of interest, such as the fact that rating agencies are remunerated by the entities to which they rate . This issue has been raised in the past, and one of the arguments that agencies usually present to defend themselves is that the ratings assigned reflect the information that has been made available to them. I believe this latter statement is false, as illustrated by the examples described below.

I raise this subject with you because your committee is launching its own inquiry into the activity of rating agencies.

As a French holder of several bonds currently listed on the official Paris stock exchange named 'Eurolist by Euronext', I respectfully wish to draw your attention to the rating assigned to the Russian Federation, which I believe provides a good example how a conflict of interest may result in the attribution to unsuccessful sovereign issuers of a rating of unjustified quality, despite the full knowledge of the said default by the rating agencies .

In 1918 the Bolsheviks unilaterally defaulted on all of the Russian loans listed in Paris and since then successive internationally recognized Russian governments have refused all contact with their creditors in good faith, in flagrant violation of the principles accepted in international law.

As the bearer of these loans, I am shocked to see that the three main rating agencies all give an investment grade to this issuer; these agencies have all been officially notified of Russia's default, and by assigning it an investment grade rating these agencies notably bypass one of their own evaluation criteria, which is that of the willingness to pay on existing loans evidenced by the issuer.

Since it is quite clear that this willingness to pay does not exist (and that in fact Russia has notoriously defaulted) on the listed loans in Paris mentioned above, while simultaneously it pays both the interest and the capital on the Russian loans listed in Luxembourg, this issuer is very clearly in 'selective default', a situation which is not taken into account in the current 'investment grade' rating. Present and future investors are seriously deceived.

This situation is identical to that which prevails concerning the People's Republic of China (PRC) which also issued bonds listed in Luxembourg and which refuses to honor loans issued before 1949 and held by French and American citizens.

I take advantage of your current survey on the activity of rating agencies to draw your attention to two documents extremely well prepared by Sovereign Advisers, a private financial analysis company, which highlights the obvious shortcomings observed in the rating assigned to the RPC, as well as the probable reasons for their conduct.

The reason why I draw your attention to these documents is that the same reasoning can be strictly applied to the Russian Federation. These documents can be found at the following URLs:

1: www.globalsecuritieswatch.org/Chris.Dod...pt2007.pdf (8.9 MB)
2: www.globalsecuritieswatch.org/newswire.pdf

Having briefly highlighted the fact that Russia and the PRC have been given erroneous ratings, I would now like to explain why I think this is so.

It is common knowledge that the liberalization of the markets in these two countries has led them to issue securities on the international markets. In particular, Russian and Chinese companies with private or public capital have borrowed in increasing proportions in recent years, and the mandatory rating process for each issuer (without which foreign investors would be reluctant to lend) has accompanied by a bonanza of income and profits for rating agencies. It is crucial to understand that it is not customary to give the private issuer of a given country a higher quality rating than that attributed to the sovereign issuer of that country. Thus, no Russian company can be given a higher rating than the Russian Federation itself. As a result, if the agencies had given Russia the rating it deserves, that is to say 'selective default', they would have been deprived of an enormous source of profit since no Russian transmitter could then hoping to obtain a better rating than 'selective default', no issuer would have come to ask to be rated, knowing that no investor would have lent to an issuer rated 'selective default'. And since it is the issuer who pays for its note, there would have been no income for the agencies. This applies equally to the PRC and its companies.

Although the subject above - the ratings assigned to defaulting sovereign issuers - is somewhat removed from the US mortgage market and the rating of the 'sub-prime' papers that are the source of the current crisis, I believe that these two topics arise from very similar conflicts of interest, that they involve hundreds of billions of dollars in debt, and are therefore worthy of your immediate attention. I think it is useful to recall that in Sochi on September 22, 2007 President Putin confirmed a program of investments of 1000 billion dollars, specifying that "private investors, both national and foreign, will participate", while Mr. Ivanov, Acting Prime Minister, added that "additional tools will ensure a high level of return on investment". Without a 'selective default' rating, investors will be led to get the wrong idea about the propensity of the Russian government and its crown corporations to honor their debts.

As a holder, among the 316.000 other French holders of Russian bonds, whose outstanding amount is carefully estimated at more than 90 billion dollars (the sums owed by the PRC to American citizens amounting I believe to several hundreds of billions respectfully ask you to include the question of the ratings assigned to defaulting sovereign issuers and their Crown corporations within the scope of your investigation, in order to obtain that by reporting the absence of willingness to pay, these notes give a precise account of the historical attitude of these issuers to the investment community and inform them of the potential risks to which they are exposed, risks which are now concealed by the rating agencies in violation of their own criteria , as very clearly described in the two documents cited above.

I thank to de votre attention.
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Christophe
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by Christophe » 29/10/07, 09:48

The arsonists: Central banks overwhelmed by globalization

The economic world has changed. The risks also: relocation, excess global liquidity, sharp variation in asset prices, even deflation. Yet central banks remain obsessed with the possible return of inflation. As if their ways of thinking, their institutional organizations had always remained in the 80s and 90s and the oil shocks. To tolerate this phase shift, sometimes combined with an absence of transparency and accountability, is to believe that we can be content with fine speeches when a planetary fire risks breaking out at any time.

http://www.amazon.fr/dp/2262025614/
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Christophe
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by Christophe » 06/11/07, 21:01

Is the big crash for tomorrow?

Like no other nation in the world, the United States lives on credit. They borrowed up to $ 2,3 billion per day on average over the years 2005 and 2006. And who is lending all this money to them? China, other Asian countries and oil countries. Obviously, such an imbalance cannot last. What impact will the financial crisis unleashed this summer have on the world economy? So is the great crash of global finance for tomorrow?


http://www.imagine-magazine.com/lire/ar ... rticle=762
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