tvb

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

You're very ill-informed Mirsovir, so happy to trade with you "often and in volume". The ratings for corporate ratings have been good, OVERALL, although there are always going to be some exceptions and bad calls. Enron, Worldcom, etc. were misjudged by not only the rating agencies, but most everyone else on Wall Street, including the analysts on the buy and sell-side. The bad calls from the Asian crisis were for sovereign, not corporate ratings. Look at the corporate default statistics by rating category and you will find that, OVERALL, they are VERY accurate and predictive. That is simply a statistical fact.

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).

Buffett's Soggy Logic on Guarantors' Ratings

Buffet is right on the money with his comments and, again, shows his integrity by not allowing his stake in MCO to prevent him from criticising the rating agencies. Bravo!!!! Of course there are exceptions and of course the market is not always right but it is truly extremely rare, if not almost non-existent, to find a 14% yielding bond (c. 10% more than gov't yields) that is truly AAA risk/"risk free". Buffet was merely pointing out one anecdotal piece of evidence that supports what is now obvious (that these ratings were a joke). I don't think he ever said or implied that this was the only evidence or that markets were 100% efficient.