David Jacob, who left the company last year, warned that policy makers have not done enough to reduce reliance on the agencies, whose ratings have been used to help determine the cost of money for governments and businesses for more than a century reports The Telegraph.
“They’re there because people have to have them, not because people believe in them,” Mr Jacob told Bloomberg. “Maybe retail investors do, that’s the unfortunate part, but I think institutional investors don’t.”
His comments are likely to increase calls for further regulation of a market dominated by S&P, Moody’s and Fitch.
Ratings agencies have been blamed for fuelling the financial crisis by inflating ratings on securities backed by sub-prime mortgages.
According to claims in the US Senate last year, analysts at the three firms were pressured to give their stamp of approval to complex investments in order to win lucrative business from Wall Street banks.
Bankers then spun risky mortgages into securities supposedly as safe as government bonds, allowing risky lending to accelerate.
“Ratings are not God’s holy work. It’s a business. It’s a fine balance between trying to get a certain amount of market share versus losing your credibility,” Mr Jacob added.
“I was there three and a half years and I still don’t understand it. When people can use the same set of letters and mean entirely different things, then they become useless.”
Mr Jacob said grading government bonds is outside ratings companies’ traditional areas of expertise. When S&P downgraded the US government in August, Treasury yields actually fell to record lows, confounding market expectations.
Standard & Poor’s, Moody’s and Fitch said a prime reason for the widespread criticism is that their function is widely misunderstood.
At the time, David Riley, Fitch’s global head of sovereign ratings, said: “The impression might be that if we downgrade Spain, or whoever, we’re cutting them off and making their situation more difficult. Yet, at the same time, we hear a lot of people saying ‘you’re late to the party, the market’s already there, it’s irrelevant what you’ve done’. We can’t be both. We can’t be all-powerful and irrelevant.”