logo
  Join        Login             Stock Quote

Abolish Credit Rating Agencies? Some Say So

 December 14, 2009 09:24 AM


In an article I wrote back in April of 2007,  I assigned blame to various individuals, industries, and institutions for the financial and mortgage meltdown that led us to the current financial mess we find ourselves in. One such perpetrator has received a significant amount of flak recently, and some suggest they should be restructured or even eliminated altogether. I am speaking, of course, of the credit rating agencies, such as Moody's Corp. (NYSE: MCO), Fitch's, and Standard & Poors - which is owned by The McGraw-Hill Companies (NYSE: MHP).

[Related -These Small Caps Now Hold Deep Value]

Through further research, I compiled a list of options we have for dealing with the credit rating agencies.

Option 1: Restructure Them

In a January 3rd New York Times op-ed, columnists Michael Lewis and David Einhorn rail against the rating agencies:

"End the official status of the rating agencies. Given their performance it's hard to believe credit rating agencies are still around. There's no question that the world is worse off for the existence of companies like Moody's and Standard & Poor's. There should be a rule against issuers paying for ratings. Either investors should pay for them privately or, if public ratings are deemed essential, they should be publicly provided."

[Related -Russell 2000 Showing Relative Weakness at the New Highs]

Those are some pretty harsh words, Mr. Lewis and Mr. Einhorn, but as a professional investment adviser I happen to agree with you. Issuers buying ratings from rating agencies to sell investors securities is akin to an individual (issuer) buying a credit score (rating) from Experian (rating agency, who is competing with other rating agencies for business) then going to any number of banks (investors) to apply for a loan (security).

As you can imagine, the individual wants a good credit rating from Experian, and Experian desperately wants the individuals' business, so their incentives are aligned. But what about the bank's incentive? Their incentive is to make sure their money is safe, but they only have this Experian rating to rely on. Too bad for the bank.

Option 2: Eliminate Them

I like Mr. Lewis and Mr. Einhorn's ideas, but I found another viewpoint that I might like even more. Financial blogger Paul Kedrosky takes it one step further and suggests that rather than restructuring these entities, we should do away with them altogether. Mr. Kedrosky correctly points out that there is no regulatory oversight for equities, which begs the question: Why don't we just let the private investors rate these securities, like they do with equities? Sure,  private investors don't always value equities perfectly, but obviously rating agencies don't either.

Option 3: Increase Oversight

Yuck. I don't even want to think about this option. But if any of you think this one is a good option, please share your thoughts.

Option 4: Do Nothing

I doubt many of you think that we should do nothing. The credit rating agencies really messed up and led investors to slaughter by not recognizing (or perhaps willfully ignoring) risks in the products they rated. But again, I'm willing to hear any opinion out.

Freund Investing Managing Member Ryan Freund holds no position in any of the companies mentioned in this article. Freund Investing has a solid Disclosure Policy.

iOnTheMarket Premium
Advertisement

Advertisement


Comments Closed


rss feed

Latest Stories

article imageRussell 2000 Showing Relative Weakness at the New Highs

A quick “Quad Index” Grid shows us that the small-cap Russell 2000 is showing relative strength to the read on...

article imageThe Poster Boy For Liberal Economics Discovers The Tax Factor

Paul Krugman seems to be having a supply-side-economics moment… sort of. Raising taxes, the NY Times read on...

article imageMacroprudential Policy And Distribution Of Risk

There is very little doubt that housing prices and leverage played a strong role in the global financial read on...

article imageIs the World Turning Japanese?

Many really think so, but reality suggests read on...

Advertisement
Popular Articles

Advertisement
Daily Sector Scan
Partner Center



Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.