Goldman’s asset management arm, GSAM, is apparently pushing a “new global credit strategy” to its clients: one which will cease to rely on ratings and will instead focus on market prices as arbiters of risk.
There are of course flaws in that plan: firstly, asset management clients now, more than ever, will surely want to err on the side of conservatism. Ratings may be flawed, but at least they are universally so. They are a known unknown, in that sense. To play devil’s advocate here, credit spreads, by comparison, are more of an unknown unknown. Data is limited, history is short, the markets can be thin, and the prices are volatile.
To boot, the biggest failings of ratings have been with structured products. Corporate ratings might well be behind the curve too, but their inaccuracy over the past few months has not been a major problem in this crisis. And historically, they have proved resilient.
That said, if ever there was a time to break out from the ratings-based technocracy, and all its flaws, now is surely it.
From Reuters:
LONDON, May 1 (Reuters) – Goldman Sachs’s (GS.N) fund arm is developing a new global credit strategy for institutions that will rely on market prices rather than heavily-criticised credit rating agencies.
“Clients often give investment guidelines determined by credit ratings, but we don’t think that’s the way to think about risk,” said Andrew Wilson, global co-head of fixed income and currency at Goldman Sachs Asset Management (GSAM).
Instead, GSAM’s approach is to segment credit spreads into five groups, to assess how issuers are trading in relation to their peers, Wilson told Reuters in an interview.
“So the widest 20 percent are the most risky, regardless of the rating,” he said.
“That has helped us identify risky names and react in a timely fashion, as the market is a much better guide. Credit spreads widen immediately on bad news, whereas it might take a while for the ratings agencies to reflect that.”
The trouble is, on face value, this all seems remarkably simplistic. We’re assuming – hoping – that GSAM will have a few more quantitative wrinkles up its sleeves, because after all, noting the discrepancy between market prices and rating-implied prices is nothing new at all.
Related links:
Market implied ratings – Risk Magazine, 2003
Rating shopping, governmental edition – FT Alphaville