A Couple of Thoughts on the Ratings Agencies…
While I wait to catch the train out of NYC for the weekend, I thought I’d get my post count up by putting an answer to a question in my previous post into a separate discussion of its own since it involves the ratings agencies, a subject that can (and has) taken on a life of its own separate to my last post.
And that said I’d also ask more out of curiosity; my understanding is that currently the rating market is pretty much unregulated by the government so what/where is the hand of the free market moving to punish the rating agencies for their mis-rating fiasco?
There are regulations for the ratings agencies and the government did grant an oligopoly to the “big three” ratings agencies thirty plus years ago (I think). In addition, with the way some of the rules are set up for certain types of investors like pension funds, the incentives to get as much of a securitization pool rated AAA is huge since many institutions require that fixed income investments be rated AAA (and the ratings have to be from a Moody’s, S&P or Fitch, one of the nationally-recognized companies). The crisis did not change this so it is no surprise to see that the ratings agencies, for now, have yet to bear the full brunt of what they were responsible for.
I think that the problem with the ratings agencies was the fact that they did a poor job (mildly put) of rating the securities as opposed to the government-granted oligopoly. As it is my belief that the business model that the ratings agencies followed (i.e. being paid by the issuer as opposed to investors) was not going to change, deregulation would have meant that instead of having 3 ratings agencies fighting for market share by capitulating to the banks, we may have had several more companies. No regulation made Moody’s or S&P as aggressive with their ratings as they were. It was all about market share and profit.