Cras
David Karasek, May 2013
Moody 's, S&P and other credit rating agencies deserve a junk rating
Almost six years after the financial crisis, European and US regulators have yet to solve the problem of biased credit rating opinions. Ideas for radical reforms of the industry have failed. Issuers still pay the bills and still get to choose which agency rates their debt. The oligopolistic structure hasn’t changed – Standard & Poor’s, Moody’s and Fitch together rate 96 per cent of all the world’s bonds. Why does the post-crisis landscape look such a lot like it did pre-crisis? Intense lobbying by powerful market players such as rating agencies and Wall Street could be one of the reasons, critics of the industry argue. But there are other, not so obvious reasons. In this paper I argue that regulative action should be approached with great care. Nobody will be helped by tight regulation that suppresses innovation and growth in the financial sector. Regulation is not an end in itself. Rather I argue that there are ways to improve transparency and public knowledge on the idea of open-source models that will ultimately strengthen global financial stability. Investors deserve a failing grade too There is a broad consensus that credit rating agencies (CRAs) contributed to the current financial crisis. It all began in the US in 2007 with problems in the subprime mortgage market and has since extended to global dimensions. The agencies underestimated the credit risk associated with securitization which sparked heated debates around the world. Structured finance instruments are more complex than most of the traditional bonds and securities that CRAs have been rating for more than 100 years. CRAs have been criticized for not fully understanding the risks and complexity of the mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) that they rated. In the CRAs’ defense, it would be irrational to expect them to fully understand the highly innovative and complex
Moody 's, S&P and other credit rating agencies deserve a junk rating
Almost six years after the financial crisis, European and US regulators have yet to solve the problem of biased credit rating opinions. Ideas for radical reforms of the industry have failed. Issuers still pay the bills and still get to choose which agency rates their debt. The oligopolistic structure hasn’t changed – Standard & Poor’s, Moody’s and Fitch together rate 96 per cent of all the world’s bonds. Why does the post-crisis landscape look such a lot like it did pre-crisis? Intense lobbying by powerful market players such as rating agencies and Wall Street could be one of the reasons, critics of the industry argue. But there are other, not so obvious reasons. In this paper I argue that regulative action should be approached with great care. Nobody will be helped by tight regulation that suppresses innovation and growth in the financial sector. Regulation is not an end in itself. Rather I argue that there are ways to improve transparency and public knowledge on the idea of open-source models that will ultimately strengthen global financial stability. Investors deserve a failing grade too There is a broad consensus that credit rating agencies (CRAs) contributed to the current financial crisis. It all began in the US in 2007 with problems in the subprime mortgage market and has since extended to global dimensions. The agencies underestimated the credit risk associated with securitization which sparked heated debates around the world. Structured finance instruments are more complex than most of the traditional bonds and securities that CRAs have been rating for more than 100 years. CRAs have been criticized for not fully understanding the risks and complexity of the mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) that they rated. In the CRAs’ defense, it would be irrational to expect them to fully understand the highly innovative and complex
References: Bahena, Amanda. "What Role Did Credit Rating Agencies Play in the Credit Crisis?." Iowa Law School. (2010): n. page. Web. 10 May. 2013. . Foley, Stephen. "Rating agencies: Outlook unchanged."Financial Times 14 Jan 2013, n. pag. Web. 10 May. 2013.