Tuesday, January 8, 2013

Rating agencies

Can Open Source Ratings Break the Ratings Agency Oligopoly?

Yves here. One of the causes of the financial that should have been relatively easy to fix was the over-reliance on ratings agencies. They wield considerable power, suffer from poor incentives, in particular, that they can do terrible work yet are at no risk of being fired thanks to their oligopoly position, and are seldom exposed to liability (they have bizarrely been able to argue that their research is journalistic opinion, which gives them a First Amendment exemption). But they are not big enough moneybags to be influential donors, nor are they critical to the financial infrastructure.
Yet they’ve managed to stymie meaningful reforms. Scarecrow and Jane Hamsher detailed how Standard & Poors started threatening to downgrade US debt just as provisions in Dodd Frank that would have made them liable for their opinions, just like other experts, were moving towards a vote. And, mirabile dictu, they managed to get that provision stripped from the bill.
Note that the EU is in the process of imposing rules that would make the ratings agencies liable for “mistakes in case of negligence or intent.” This presumably would apply only on ratings of issuers based in the Eurozone; if a European investor relied on ratings to invest in a US security, these rules would not apply. Some commentators are skeptical of other provisions, namely, ones to curb sovereign debt ratings and restrict ownership of ratings agencies.
At the same time, even though ratings of structured products have proven to be sorely wanting, investors still prefer having a bad metric to no metric, particularly since that allows them to shift blame if Something Bad Happens (“everyone else in the industry uses them, we would have lost business if we tried something different”).

Read more at http://www.nakedcapitalism.com/2012/11/can-open-source-ratings-break-the-ratings-agency-oligopoly.html#hP8BesuhzHU8hGcm.99 

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