Aussie Approach is Standard & Poor (MHP)

Today's Sydney Morning Herald has reported that credit ratings issued by Standard & Poor's, the rating agency subsidiary of McGraw Hill (MHP), will not be available to retail investors after January 1. The rating agency has withdrawn its retail license application in response to a move by the Australian Securities and Investments Commission (ASIC) to withdraw protection from liability for ratings.

A move like ASIC's has been anticipated by many in the investment community. The question has been what the rating agency response would be. That is now answered. It would be peculiar if Moody's and Fitch did not follow Standard & Poor's. The issue is what the rating agency involvement will look like, if all three bow out of the "retail" market, but are available for the "wholesale" market.

Some have argued for greater accountability on the part of the rating agencies. Yet, it is not clear how such a model would work. Rating agencies provide opinions with limited information and an insignificant amount of compensation relative to the value of the securities rated. To be held to a downside risk with a nominal fee for an upside puts the rating agencies in the position of an insurance company with inadequate premiums. The appropriate response, then, was for Standard & Poor's to bow out.