UPDATE 2-PIMCO’s Gross: rating agencies not very useful

(Updates with more comments, context, adds byline)

By John Parry

NEW YORK, May 5 (BestGrowthStock) – The big rating agencies are no
longer very useful to investment companies such as the world’s
biggest bond fund manager PIMCO, which can be nimbler in
anticipating shifts in the credit quality of debt, the company
said on Wednesday.

Analysts have blamed rating companies, such as Standard &
Poor’s, Moody’s Investors Service and Fitch Ratings for
contributing to the financial crisis by assigning top ratings
to securities linked to mortgages.

The credit rating agencies “no longer serve a valid purpose
for investment companies free of regulatory mandates,” wrote
Pacific Investment Management Co.’s managing director Bill
Gross in a May Investment Outlook on the company’s Web site.

“Their warnings were more than tardy when it came to the
Enrons and the Worldcoms of ten years past, and most recently
their blind faith in sovereign solvency has led to egregious
excess in Greece and their southern neighbors,” Gross wrote.

In recent months as heavily debt-laden Greece has been
punished in the debt markets and bond investors’ fears have
started to spread to some other European countries, the
agencies’ sovereign ratings have come under closer scrutiny
from investors.

The big three rating agencies can be timid and slow to
downgrade sovereigns, Gross added, citing Standard & Poor’s
recent one-notch downgrade of Spain as an example.

On April 28, S&P cut Spain’s rating one notch on the
economic view.

“S&P just this past week downgraded Spain “one notch” to AA
from AA+, cautioning that they could face another downgrade if
they weren’t careful…And believe it or not, Moody’s and Fitch
still have them as AAAs,” Gross wrote.

Spain has 20 percent unemployment and a recent current
account deficit of 10 percent, Gross said, adding that its
government bonds are already trading as if they were rated at
Baa levels; in the lower echelons of investment grade.

In late April, Mohamed El-Erian, chief executive of PIMCO
said the company had been quick to reduce its exposure to
Greek, Portuguese and Spanish debt “on account of our concerns
about deteriorating public finances.”

El-Erian then added that PIMCO “stayed on the sideline and
did not participate in any of the recent bond offerings by
these countries.”

Despite his criticisms, Gross, who manages the PIMCO Total
Return Fund, the world’s biggest bond fund with assets under
management of some $220 billion, acknowledged that the big
rating agencies are necessary for some investors.

“I come not to bury the rating services, but to dismiss
them. To tell the truth, they can’t really die — they serve a
necessary and even productive purpose when properly managed and
more tightly regulated. A certain portion of the investment
world will always need them to “justify” the quality of their
portfolios,” according to the law, Gross wrote.

The U.S. Securities and Exchange Commission designated the
three rating agencies as “Nationally Recognized Statistical
Ratings Organizations” in 1975. That meant regulated financial
institutions such as banks, insurance companies and pension
funds would be guided by the agencies ratings, he wrote.

However, the rating agencies services “are overpriced as
well as subject to the influence of the issuer, which in turn
muddles their minds and clouds their judgment,” Gross wrote.

In November, a regulatory group, the National Association
of Insurance Commissioners, said it hired PIMCO to develop a
model to determine risk on 18,000 residential mortgage-backed
securities held by the nation’s insurers, in a bid to improve
on traditional bond ratings.

Investing Research

(Additional reporting by Jennifer Ablan, Walden Siew and Al
(Editing by Theodore d’Afflisio)

UPDATE 2-PIMCO’s Gross: rating agencies not very useful