Editor's letter

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Multi-billion dollar corporations with massive global influence rarely admit they are wrong. So you know a company has made a world-class blunder when its chief executive issues a mea culpa via the pages of a financial magazine.

So it was this month, as Moody's chairman and chief executive Ray McDaniel and his right-hand man Brian Clarkson spoke to us to explain what went wrong with JDA, the agency's much-criticised new rating methodology for global banks. The attempt to give more weight to assumptions of greater external support for banks than corporates went down like a lead balloon.

Reading their comments it becomes clearer how the agency managed to misjudge the market's likely reaction so acutely.

The range of pressures on rating agencies is immense: if their ratings don't accurately predict default, legislators hold enquiries. If they are volatile, reflecting real-time changes in the issuer's default probability, investors aren't happy. On top of that, different investors use ratings for different reasons: those that are marking positions to market are more interested in real-time assessment of creditworthiness than ultimate default probability like buy-and-hold investors. The bottom line is that a credit rating is a continual trade-off between accuracy, stability and usefulness as defined by a range of competing market uses.

Speaking out against accusations that JDA was devised for commercial imperatives - that argument resting on the observation that the beneficiaries of the new methodology were Moody's clients winning sudden and unexpected upgrades - the agency's top brass deliver a frank explanation of how competing priorities are balanced to assess credit ratings. They also display refreshing honesty in recognising a mistake and putting it right. As Ray McDaniel says: "We have nothing to gain by annoying everybody."

Nikki Marmery, Editor.

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