Rick Dugan

EU Moves to Regulate the Rating Agencies; SEC Should Follow Suit

I have to agree that the current rating system in the U.S. has virtually no predictive power and that the EU is taking a great approach, but the further recommended steps in this article are impractical and misdirected, for the following reasons:

1. The rating agencies were not the ones who caused companies to become over-levered, make bad investment decisions, sell uncompetitive products or services, etc. Most of the companies in question were in financial peril long before they were downgraded (and in fact, that is the biggest problem with the current system).

2. The companies that accepted ratings triggers were big boys who knew the consequences of downgrades and nonetheless managed their businesses poorly enough to receive them (see 1. above). Creditors have a right to build reasonable protections into lending agreements. While imperfect at best, credit ratings provide an independent means of ascertaining likely repayment risk and relative financial health.

Nobody would argue with the fact that rating agencies are very late messengers, but shooting the messenger is not going to fix the real underlying problem, which is poorly managed companies.