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Ratings Agencies Still Broken

Posted By Barry Ritholtz On May 24, 2010 @ 9:15 am In Bailouts,Credit,Regulation | Comments Disabled

[1]The WSJ has a longish article that takes a cursory look at the agencies. It does not provide much in the way of new insight into the Nationally Recognized Statistical Rating Organization (NRSRO).

It does inform us, however, that ratings shopping is not only still going on, but has been made easier, courtesy of the credit crisis.

Here is the WSJ [2]:

“The fate of ratings-shopping now hangs in the balance. The financial-regulation overhaul bill passed by the Senate on Thursday would limit the ability of bond issuers to pick firms to rate their securities. But the House version of the bill contains no such provision, and some key lawmakers have raised concerns about the idea. It remains to be seen whether the proposal will survive as the two chambers begin efforts Monday to reconcile their differences.

Critics say the system for providing critical information to bond investors continues to be compromised by a big conflict of interest: Bond issuers pay ratings firms, so raters have an incentive to give inflated grades to attract or maintain business. Investors who rely on ratings to assess a bond’s risk usually aren’t told if other raters were shown deals but didn’t end up rating them.

An examination of recent bond deals and interviews with people involved with the ratings process indicate that while ratings firms have become more cautious about giving top ratings to complex bonds, bond issuers and their investment bankers still shop around to obtain the most favorable treatment.

Some in the industry say ratings shopping may even have gotten easier in the wake of the financial crisis. S&P, Moody’s and Fitch Ratings are no longer as dominant in the business of rating bonds as they were, in part because they have pulled back partially from the mortgage market. Other players such as Toronto-based DBRS Ltd. are pushing to gain market share. Investors are often willing to buy a bond rated by one company, so issuers know that they can go to a bunch of ratings firms and pick the best one, says Jack Chen, a former Moody’s analyst who now runs his own consulting firm.”

You might have suspected that the prime enablers of the credit crisis would be more of a focus of Congress . . .

[3]

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Source:
Ratings Shopping’ Lives as Congress Debates a Fix [2]
AARON LUCCHETTI and SERENA NG
WSJ MAY 24, 2010
http://online.wsj.com/article/SB10001424052748703315404575250270972715804.html


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[2] WSJ: http://online.wsj.com/article/SB10001424052748703315404575250270972715804.html

[3] Image: http://www.ritholtz.com/blog/wp-content/uploads/2010/05/RATING_NS_20100523185029.gif

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