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the ratings agencies are approved by federal regulators and are protected from real competition. I'm confused. Surely if I decided to set up my own bond rating
by hugh3 15y ago
the ratings agencies are approved by federal regulators and are protected from real competition.
I'm confused. Surely if I decided to set up my own bond rating agency nobody could stop me?
- MartinCron 15y agoI think that it's a de-facto monopoly in that if you set up your own bond rating agency, nobody would be compelled by law to only invest in things that your rating agency considered "investment grade".
- hugh3 15y agoAh, now I understand, thanks. Anyone can rate bonds, but the ratings issued by the "blessed" agencies have legal significance and mine don't.
- OstiaAntica 15y agoThat's right. The ratings agencies sit at a critical junction in the American (and global system) so when they fail, or have mixed incentives, the whole system breaks, which is a major part of the story of 2008.
- MartinCron 15y agoIt wasn't always that way. There's a Planet Money podcast covering how the ratings agencies came to be and how thet got their legal significance. Interesting story.
- Daniel_Newby 15y agoThese days it is a bit more complicated. Now just about anyone sensible can become a "blessed" agency, a Nationally Recognized Statistical Rating Organization (NRSRO). The catch is that the biggest rating agencies accept payments by the company issuing the bond. What happens is that Bank of Insanity gives Moody's a check for $500k to rate their super-senior diseased livestock bond. Moody's then says "at least 5% of the cows will probably survive, and $500k is a lot of money, so this bond is investment grade!" That's why things work out so poorly.
- chriserin 15y agohttp://en.wikipedia.org/wiki/Nationally_recognized_statistical_rating_organization http://en.wikipedia.org/wiki/Nationally_recognized_statistic... Nobody can stop you, but nobody can legally use your ratings in regulatory filings.