I Would Not Want To Be A Rating Agency These Days

By: ispeculatornew
Date posted: 08.10.2011 (5:00 am) | Write a Comment  (0 Comments)

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I know, rating agencies have screwed up over the past few years. They misjudged an incredibly high number of products that ended up duping investors who were buying what they considered to be nearly risk free AAA structured products. No doubt about it, they screwed up and because of that I have not seen anyone come to their defense. I’m not saying they’re perfect, far from it, but please take a moment to think about the flip side.

How Should They Rate Such Products?

How in the world can a rating agency determine the credit worthiness of complex products that own tranches of thousands of other products? Many of these are nearly impossible to rate and while the job that has been done by Moody’s and Standard & Poors is probably poor by any standard, has anyone else suggested a better way to value these?

Conflicts Of Interest

The major problem that I see is that these rating agencies depend on the same companies that they must rate. When a bank goes to Moody’s to get ratings on its newly created/structured products, there is a major conflict of interest here. Give a bad rating? You will likely not get as much business. Give an overly optimistic rating? You might be criticized if things do end up going wrong.

It’s Just Too Political

S&P made a major error when it issued its initial downgrade of the US Government as it made a $2 trillion error. No matter how significant or not that error was, there is no doubt that the White House was going to jump all over it. The US government has been downplaying the credibility of S&P, its justification and its rating obviously. Geithner and others are far from being the only ones. European governments have even one as far as to threaten some rating agencies of losing business if they do end up downgrading some countries.

What Would A Rating Agency Need To Do To Gain Credibility?

I’m serious… is there anything that could be done? It just seems to me as if there is no way. Any good rating is simply forgotten while screw ups will end up in the media. Do you think there any possibilities that Moody’s, Standard & Poors and others can actually regain a solid reputation? If not, does it matter? What other system could work better?

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