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Ratings Agencies Abject Failure

Posted By Barry Ritholtz On April 30, 2009 @ 8:00 am In Bailout Nation,Legal,Markets,Regulation | Comments Disabled

“Ratings agencies just abjectly failed in serving the interests of investors.”
-SEC Commissioner Kathleen Casey

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Nice takedown on the highly conflicted, over rated ratings agencies in Bloomberg [1] yesterday:

“Investors, traders and regulators have been questioning whether credit rating companies serve a good purpose ever since Enron Corp. imploded in 2001. Until four days before the Houston-based energy company filed for what was then the largest-ever U.S. bankruptcy, its debt had investment-grade stamps of approval from S&P, Moody’s and Fitch . . .

As the U.S. and other economic powers devise ways to overhaul financial regulations, they have yet to come up with plans to address one issue at the heart of the crisis: the role of the rating firms. That’s partly because the reach of the three big credit raters extends into virtually every corner of the financial system. Everyone from banks to the agencies that regulate them is hooked on ratings.

Debt grades are baked into hundreds of rules, laws and private contracts that affect banking, insurance, mutual funds and pension funds. U.S. Securities and Exchange Commission guidelines, for example, require money market fund managers to rely on ratings in deciding what to buy with $3.9 trillion of investors’ money.

State regulators depend on credit grades to monitor the safety of $450 billion of bonds held by U.S. insurance companies. Even the plans crafted by Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Timothy Geithner to stimulate the economy count on rating firms to determine how the money will be spent.”

There’s a ton of good stuff in the full article — go read it . . .

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Sources:
Flawed Credit Ratings Reap Profits as Regulators Fail [1]
David Evans and Caroline Salas
Bloomberg, April 29 2009

http://www.bloomberg.com/apps/news?pid=20601109&sid=au4oIx.judz4&


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[1] Bloomberg: http://www.bloomberg.com/apps/news?pid=20601109&sid=au4oIx.judz4&

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