Finance Committee on April 2nd, 2009

[John McKay, Liberal, Scarborough—Guildwood, ON]

That's a change in your policy.

[Peter Bethlenfalvy]

Yes, that's a change.

[John McKay, Liberal, Scarborough—Guildwood, ON]

There are certain things now that you will not rate.

[Peter Bethlenfalvy]

Correct, and in fact we've been asked to rate some things that we refused to rate because they didn't have enough disclosure that we could put out in the marketplace.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Is there a consensus among your colleagues that there are certain products you all should not be rating, as opposed to, say, this time last year, when you seemed to be rating everything, some of which might even have been true?

[Peter Bethlenfalvy]

I don't know if I can be specific, but I certainly can generalize. This is not just a corporate view, it's also a personal view. The degree of complexity was much too great. The innovation that occurred in the financial markets was much too great for investors and everyone else to fully comprehend. Now, that's great in hindsight, but we are where are.

It's not just about disclosure. We could disclose 200 pages of information. It has to be summarized, relevant, and understandable.

[John McKay, Liberal, Scarborough—Guildwood, ON]

It has to be backed by something called reality.

[The Chair, Conservative, James Rajotte]

Thank you.

Monsieur Carrier.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Thank you, Mr. Chair.

As you can see, we have only a very short time.

Hello everyone. I would first like to commend Mr. Phillips, who gave an excellent presentation on the state of credit services for members of credit unions. I have always been a member of a credit union, on principle. Credit unions have investment programs, investment trusts.

Personally, I was indirectly affected by this, since I had investments in credit unions, and the infamous ABCP did not perform well. That is why I will immediately move on to Mr. Bethlenfalvy, and I would like to address the question of the ABCP that was rated by his credit rating agency.

I have already asked Bank of Canada representatives who controlled the rating agencies. I came to the conclusion that no one was exercising control over the rating agencies. I was told that the need to have a good reputation forced them to do a good job.

Concerning how you bill your clients, since that is how you operate, if I understand correctly, you charge a flat fee to those who need a rating. Can you tell me if the flat fee is the same every time you are asked for a rating or is each case different? Thus, in the case of ABCP, could the cost have been higher because there was greater risk or because it was more complicated?

[Peter Bethlenfalvy]

Thank you for the question.

The way our fee structure works, we have a flat fee, a fee schedule. The investment banks or the issuers bring us transactions and we give them the flat fee schedule. If anything, the prices are sometimes negotiated down—not up, they're never negotiated up. So we go down, and we try to have consistency. We try to charge everyone the exact same price and to be competitive and fair in that regard.

We're a private company. We don't have quarterly earnings targets to meet. It's been private since its inception in 1976. Accountants are, through the private company.... I think the ownership would be better suited to talk about the accountants and accounting, but the fees are basically paid in two forms off the flat fee. You have two options: you can either pay a flat fee and just issue as much as you want under that, or you can do it à la carte, meaning that every time you issue a security, a fixed fee is charged.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Could you provide us with documentation on your fee schedule?

[Peter Bethlenfalvy]

I will follow up with that.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

I would also like to have some statistics on asset-backed commercial paper. Our goal is to try to understand the situation.

I stated that I had come to the conclusion that there were no regulations. Rating agencies are not regulated by any organization. Correct me if I am wrong. In your presentation, you stated that a national regulatory body would be a coherent, effective and efficient means of regulating the rating agency sector.

Would that be something new? Does it already exist? Do you believe you need regulations?

[Peter Bethlenfalvy]

We have oversight through the IOSCO code—the International Organization of Securities Commissions, in which the Quebec Securities Commission and the Ontario Securities Commission are active participants. We are regulated through the SEC. We follow the rules and have been registered with the SEC since 2003.

So there is regulatory oversight. We meet all the securities regulators' requirements and we support and are fully compliant.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Wallace, please.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chairman.

Thank you, everyone, for coming today.

Do you mind if I call you Peter?

[Peter Bethlenfalvy]

Not at all.

[Mike Wallace, Conservative, Burlington, ON]

I know how to say that one correctly.

I can't disagree with my colleagues. I sat through the meetings at the finance committee here in the last session--or Parliament, I guess we call it--with the discussion of the asset-backed commercial paper. We had people here who--let me put it this way--were not really sophisticated investors and who relied completely on your rating.

It's not just us hearing it here. The National Post talks about you as the major international debt-rating agency that refused to give ratings to Canadian ABCP, commercial-backed paper, because they were not backed by levels of liquidity agreements and standards elsewhere, and so on and so forth. So it was not just us here. The financial world was on top of your rating of these things, and you've heard a lot, so I don't want to.... We would agree with some of the criticism that you've heard from across the way, and you came here today to sort of give us advice.

I talked to a witness at our Tuesday meeting about how I want to make sure that the public, and I, understand the difference. We had a problem with the commercial paper, called asset-backed commercial paper, but that pool you talked about had a lot of things in it that were questionable, in terms of.... Securitization is a need. That's what we were hearing about. My concern, and I want to make sure I'm accurate, is that the $12 billion facility that we're offering through this stimulus package is really for hard assets, assets people can understand—whether they're cars, trucks, or floor plans for dealerships.

A year ago, we were complaining about commercial paper and how it wasn't understandable, wasn't fully disclosed. It had a lot of things in there that I think Mr. Mulcair is absolutely...uncollectable if things went bad. Obviously, they did go bad. That is not what we're doing here, and I want you as a rating agency to tell me what the difference is, if you could.

[Peter Bethlenfalvy]

There are a couple of things.

First off, I share the concerns about the asset-backed commercial paper, and I welcome the opportunity--as painful as that may be--to sit before you and take the majority of questions. It's the right process, and we don't want to shirk from that responsibility.

One of the things was that we backed up these pools of assets with something called “market disruption liquidity lines”, and what we learned is that not all firms honour their obligations, that the conditions in there are relevant. So in January of 2007--even before this crisis hit--we said we were not going to do any more asset-backed programs without global liquidity standards, meaning you can pretty well back up the CP with an unconditional bank line of credit. In fact, in September 2007, we announced the conditions. We can now say that every conduit is 100% backed up by global liquidity standards. So in terms of how you make sure this doesn't happen again, that's an important thing.

On my point about the underlying assets, I do agree with you that there are real assets, that they're real needs, and one of the goals of that Canadian secured credit facility, I think, is to help get confidence again in the market. The rules aren't public. I suspect they'll require ratings again.

Obviously, you don't get too many kicks at the can. Our integrity is our reputation and whether the market will continue to use our ratings. So far the market continues to embrace our ratings. We were very open and honest with all of the investors. I dialogued with them extensively throughout the crisis, and continued to do so, through the Montreal accord and beyond. So I think we will continue to try to do our best, to take lessons from the past, and to ensure they don't happen going forward.

[Mike Wallace, Conservative, Burlington, ON]

Another question?

[The Chair, Conservative, James Rajotte]

One minute.

[Mike Wallace, Conservative, Burlington, ON]

I'll make it simple.

You talked about innovation in the financial markets. I call it imagination, mostly. Has the financial system become too complicated for the average person? Should we not get back to the fundamentals? Are you seeing that happen in the marketplace, since you are rating these securities that are coming forward?

[Peter Bethlenfalvy]

I think there's a degree of complexity that the market accepted. When we said we're not going to rate any more asset-backed programs with market disruption in January 2007, we almost got thrown out of Canada by investors, dealers, and others. There was quite a wave of innovation that spread through the planet, maybe driven by liquidity and too much leverage.

I would say three things. One, there's too much leverage in the global system. That has to rebalance. Number two, there has to be transparency and disclosure. To various members' comments, you've got to understand the assets; they've got to be identifiable. The third is complexity. If it's too complex, just say no. That's why we didn't rate some asset-backed commercial paper programs that came to us. We said no.

[Mike Wallace, Conservative, Burlington, ON]

Thank you very much.

Thank you, Mr. Chair.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Pacetti, please.