David Ruffley MP has been asking searching questions of the main credit ratigns agencies, as the Treasury Select Committee (TSC) continues to dig into the causes of the financial crisis.

Faulty high ratings assigned to mortgage-backed securities have been blamed as one of the causes of the financial crisis, as banks issued investment vehicles in which they did not fully understand the risks. As part of the TSC's investigation into credit ratings agencies, representatives of Standard & Poor's (S&P) and Moody's have appeared in front of the TSC. When questioned, they were unable to recall what percentage of investment grade ratings in the structured finance instrument market in 2006 they subsequently had to downgrade.

The session was reported on widely in the media, including in the Daily Telegraph here: http://www.telegraph.co.uk/finance/financialcrisis/9129650/Ratings-agencies-Moodys-and-Standard-and-Poors-refuse-to-apologise-to-MPs-for-financial-crisis.html

You can find the full transcript of David's exchange with Moody's and S&P below.

Q188 Mr Ruffley: Could I ask Moody's first and then S&P, of the investment grade ratings of A or higher in 2006, what percentage of those in the structured finance instrument market did you have to downgrade subsequently?

Frederic Drevon: Again, I am afraid I do not have those specific data in front of me. If it is the US housing market, it is going to be a very significant percentage; if it is the European market, a very small percentage.

Mr Ruffley: The US market?

Frederic Drevon: Yes.

Mr Ruffley: What percentage? Your numbers-what are we talking, 80%, 90%, 100%?

Frederic Drevon: Again, I am afraid I will have to-

Mr Ruffley: You do not know?

Frederic Drevon: No.

Q189 Mr Ruffley: S&P, do you have any clue at all, or are you similarly clueless? The same question that I asked Moody's.

Dominic Crawley: I do not have those numbers, but we can very happily provide them.

Chair: Fair enough. Where you have said you do not have data to hand it would be very helpful if you could provide it.

Q190 Mr Ruffley: It should be burned on your minds, given that you got it so wrong. There are two possible interpretations; one is incompetence and the other is that the conflict of interest affected judgment. You said, Mr Drevon, that it was not individuals who were culpable or accountable, there were committees. How many people on average were sitting on the committees that were doing ratings for the US market for structured finance instruments? Are we talking 20 people, 10 people?

Frederic Drevon: I believe the comment was made by my colleague Dominic Crawley that in practice the average size of a credit committee would have been anything between five and 10 persons typically.

Q191 Mr Ruffley: Five and 10. I am assuming it is the same in S&P, Mr Crawley; is that right?

Dominic Crawley: It is broadly that and it is not a surprise that I would not have figures about US structured finance committees to hand. Again, if you would like that information, I can provide it to the Committee.

Q192 Mr Ruffley: Yes. The next question I have, of course, is that there were a lot of people on these committees, all of whom got it wrong. You have admitted that there were lots of downgrades. Are all those people still working in Moody's, Mr Drevon, or have any of them been laid off?

Frederic Drevon: Can I just comment on one thing?

Q193 Mr Ruffley: I would like you to comment on the question.

Frederic Drevon: I will, but downgrading does not mean there is an error or fault. Downgrading will happen if there is a financial crisis and in general we would expect ratings to get downgraded in such an environment. It does not indicate that our ratings are wrong or right, just to be absolutely clear on that. I do not have any specific numbers on people who left the company around the subprime crisis or afterwards, but the company certainly reduced in size because of reduced activity.

Q194 Mr Ruffley: It was reduced in size, okay. What about S&P? Were any people dismissed for lack of competence in pricing risk on the structured finance instruments in the US market, Mr Crawley?

Dominic Crawley: We rate structured finance instruments. We rate corporations, whatever it is. We rate according to our criteria and the committee will sit down and review information.

Q195 Mr Ruffley: We have heard all that. I am asking whether anyone has been dismissed following the disastrous mispricing of risk in relation to structured finance in the US market. I am asking you the question: what happened subsequently when the shambles unravelled at S&P, Mr Crawley?

Dominic Crawley: S&P's ratings are not about pricing risk. They are about doing assessments about the relative creditworthiness of individual instruments and that is what the committees would have sat down and-

Q196 Mr Ruffley: Did you fire anyone?

Dominic Crawley: I have absolutely no idea. The point I am stressing to the Committee is that rating committees will conduct their analysis according to the criteria, and that is the way that rating committees work.

Q197 Mr Ruffley: Right. In both your case, Mr Crawley, and in your case of Moody's, you do not think there is anything to apologise for. Is that right, Mr Crawley, you have nothing to apologise for? You have no regrets?

Dominic Crawley: We have already been through this discussion.

Q198 Mr Ruffley: No, you have not given an answer. You have nothing to apologise for; is that what you are saying to the Committee?

Dominic Crawley: I have said that we regret that the assumptions that were used did not prove to-

Q199 Mr Ruffley: Let me move on very quickly, because there is an important point to all this, isn't there? It is suggested by the European Commission and others that the lack of competition in the credit rating agency market means, frankly, that you are not accountable to anybody, are you? The market can't really punish you. You can't lose a lot of business, because there are not enough competitors. You would agree with that, wouldn't you, Mr Crawley?

Dominic Crawley: We are very accountable. We are accountable every day to the market. As I said, we rate such a wide variety of instruments and entities. We interact with a vast array of investors every single day. We are regulated. We are regulated and we are accountable to our supervisors.

Q200 Mr Ruffley: But there are not many people who can leave you if they are not very happy with your performance. Let me bring in DBRS here, because I am very interested to learn what the barriers to entry in this market are for smaller players who obviously want to grow their business. What are the barriers that your outfit experienced, because you are in a position to make it clear there is a lack of competition?

Alan Reid: Sure. Regulation, perversely, is a very significant barrier to entry because there is a very significant cost associated with that. From our investment here in Europe, a significant amount of money has been spent on meeting the regulatory requirements. We have been in business, as I said earlier, since 1976 so we have an infrastructure in place. We have credibility in the market for the services that we are offering. We have demand for our ratings so as a result of that we are able to generate revenue and, therefore, support the cost of this regulation. But it is very expensive.

The second barrier to entry is the recognition of the larger names. Moody's and S&P, for example, are synonymous with rating agencies, so you think, "rating agency", and you think, "Moody's and S&P". Obviously the market has to learn that there are alternatives out there. The third area is the actual distribution of ratings, and the primary distribution of ratings through the global capital markets is through Bloomberg. We had to lobby Bloomberg for two years back in 2004 and 2005 to get them to accept our ratings. A bunch of different things makes this a very challenging industry to enter.

Q201 Mr Ruffley: Do you think the relative lack of competition hampers a proper dissemination of information? Isn't it the case that there should be more players here? Do you understand why there are not more new players entering the market?

Alan Reid: I think I have answered the question with regard to why new players can't enter the market or why it is challenging. A very significant capital outlay is required. I think you have a very significant concentration in risk in any industry if you are just looking at one or two players. I think that diversity of credit opinion is beneficial. As we have been discussing earlier today, you have talked about the issues that there have been in the market. I think the more opinion that is out there, the better it will be for avoiding crises like that in the future.