Credit Rating Agencies

Topics: Credit rating, Standard & Poor's, Credit rating agency Pages: 4 (1314 words) Published: December 28, 2011
Credit Rating Agencies

Credit rating agencies play a crucial role in the financial system, and played an important one in the events that led to its near-collapse in 2008. The business is dominated by three firms – Moody’s, Standard and Poor’s and Fitch Ratings -- whose job is to provide an objective analysis of the risk posed to investors by bonds, companies and countries. During the housing boom, the system broke down, as several billion dollars worth assets, later shown to be worthless, received high ratings from one of the agencies. A Congressional panel called them “essential cogs in the wheel of financial destruction." Critics say there is a conflict of interest inherent in the fact that the agencies are paid by the entity whose debt is being rated -- a bit like a restaurant reviewer being hired by the chef -- and investigations turned up evidence that analysts felt pressured to give investments a clean bill of health or risk losing business. Without question, the credit rating system is one of capitalism's strangest hybrids; profit-making companies that perform what are essentially regulatory roles. The companies serve the public, which expects them to stamp their imprimatur on safe securities and safe securities alone. But they also serve their shareholders, who profit whenever that imprimatur shows up on a security, safe or not. The importance of the rating agencies were compounded by their unusual legal status, one that entrenched their influence in millions of transactions. Since the Depression, statutes and rules required that mutual funds and money managers of almost every stripe buy only those bonds that have been given high grades by a Nationally Recognized Statistical Rating Organization, as the agencies are officially known. The effect was to give the three certified rating agencies in effect an oligopoly. After the housing bust, dozens of lawsuits were filed against the credit rating agencies. But they have long prevailed in such cases by...
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