tvb

Don't Try to Fix the Rating-Agency Model: Get Rid of It

The problem with the agencies is not that there are too few competitors -- quite the opposite. For corporate ratings, the agencies track record is good, overall, because there are only two main players (Moody's and S&P) and most bonds require ratings from both. For that reason, the agencies can rate objectively without the threat of losing business. In structured finance, the existence of three main agencies (Moody's, S&P, and Fitch), with ony two ratings generally needed, meant that one agency was tough on the ratings, the issuer would just go elsewhere for their ratings. This "rating shopping" is what led to inflated ratings for many structured finance credits. With more agencies, the "rating shopping" and inflated ratings would likely worsen. Competition reduces quality in industries where objectivity should prevail over a clients immediate desire (a high rating).