Rating Agencies Getting a Leash
by Edwin Ivanauskas | Tags: Investing, Banking
Part of the blame for the 2008 recession is put on rating agencies such as S&P and Moody's for giving asset-backed securities inflated ratings. These ratings are how many institutional investors such as mutual funds and pension funds decide whether to buy into an asset or not. High ratings convinced these investors to invest in many asset-backed securities that in reality were not deserving of their ratings. Bloomberg reports that the U.S. Senate has approved a proposal that would put a leash on credit rating companies.
"There is a staggering conflict of interest affecting the credit-rating industry," said Senator Al Franken, a Minnesota Democrat who offered the amendment. "Issuers of securities are paying for the credit ratings. They shop around for their ratings."
This proposal creates a board that will assess the accuracy of the grades given out by rating companies. Clearly there will be pushback which S&P has already begun.
"Credit-rating firms would have less incentive to compete with one another, pursue innovation and improve their models," said Chris Atkins, a spokesman for S&P. "This could lead to a more homogenized rating opinion and, ultimately, deprive investors of valuable, differentiated opinions on credit risk."
Companies are able to shop around to get the best rating from different agencies, but I think more of the inaccuracy in ratings was caused by their poor use of statistical analysis than their attempt to court issuers of financial instruments.
This is a good addition to the financial regulation bill and the ability for companies to shop around for their ratings definitely needs to be stopped.
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