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If someone, including rating agencies, knew something useful about bonds that were not already priced into the market, then that someone could easily be a trill

If someone, including rating agencies, knew something useful about bonds that were not already priced into the market, then that someone could easily be a trillionaire just by buying and selling. Rating agencies are not populated by trillionaire analysts. Therefore, rating agencies and their ratings are not supplying any useful information. So why do rating agencies exist? Three of them -- the profitable ones you hear about -- have licenses from the federal government. Those licenses entitle their ratings to a presumption of validity in front of bank regulators and under pension and investment rules. Yes, institutions that the government backs are entitled to invest or blocked from investing your money, whether you like it or not, based on what the rating agencies say. So they're quasi government bodies with the power to defraud you through the banks and pensions you are mandated to use and to grant government bailout guarantees you will pay for in your taxes. In return, they make lots of guaranteed cash and empower the banking system to skim more and more pension funds and investment fees from you. The sad bit is that this actually works better than lots of other systems for regulating banking and pensions that have been tried.

JonoBB 11y ago
Rating agencies are more or less out-sourced research houses - performing work that would be too costly for others to do by themselves. It an "economies of scale" type thing and someone would have do this research. So, to say that "their ratings are not supplying any useful information" is absurd. There is an extremely high correlation between default rates and ratings. Admittedly some of the fees for ratings are absolutely ridiculous. When you're doing a structured finance deal for $X billion, then 25 basis points is neither here nor there, but in $ value terms is a crap load of money. Rating agencies are cash cows, and that may be part of the problem. I worked for a rating agency for a couple of years.

JonoBB 11y ago

Rating agencies are more or less out-sourced research houses - performing work that would be too costly for others to do by themselves. It an "economies of scale" type thing and someone would have do this research. So, to say that "their ratings are not supplying any useful information" is absurd. There is an extremely high correlation between default rates and ratings. Admittedly some of the fees for ratings are absolutely ridiculous. When you're doing a structured finance deal for $X billion, then 25 basis points is neither here nor there, but in $ value terms is a crap load of money. Rating agencies are cash cows, and that may be part of the problem. I worked for a rating agency for a couple of years.