

Credit Ratings Agencies - Who made them so powerful ? - ivenkys
http://www.bbc.co.uk/blogs/thereporters/robertpeston/2010/04/rating_agencies_who_made_them.html

======
ivenkys
To me - its quite astonishing that the Ratings Agencies still hold so much
sway , given that they have been thoroughly discredited in the last 2 years.

I wonder, what it would take to have another ratings agency ? Is this simply a
case of Market Incumbency ?

~~~
jedc
Reading The Big Short by Michael Lewis was illuminating.

Essentially, the ratings agencies have done pretty well over the years on
corporate and government bonds. There is a lot of quality historical data, and
a relatively small number of institutions involved.

Their models broke down when it came to mortgages and how thousands
(millions?) of loans hang together. But that doesn't mean their models of
corporate/government debt don't still hold up.

~~~
rubinelli
I wouldn't be surprised to discover their models of corporate and government
debt contain the same systemic blindness to domino effects. They haven't been
fully tested yet, because there's always public money to save companies that
are Too Big To Fail.

------
tezza
Large pension funds have Terms & Conditions which state what classes of
debt/asset each fund is allowed to hold.

These are often defined relative to the Rating Agency score. So when the
rating changes (down), they are obliged to sell their holdings and not buy any
further debt.

~~~
nickpinkston
Quite true - which makes one wonder why these standards aren't more explicitly
stated via a standard model in the contract - as opposed to relying on a
supposedly "impartial" source.

------
gaius
_All that S &P has done is to say that Greek debt is junk; but surely Greek
debt can't in reality be junkier today than it was last week just because S&P
says so?_

Ermm, actually it can, because yesterday the probability of a bailout by
Germany was different that it is today. S&P in this case is merely reporting
what is.

------
jsm386
I don't see how an article titled 'Credit Ratings Agencies - Who made them so
powerful ?' doesn't discuss the idea of the Nationally Recognized Statistical
Rating Organizations (Yes, there is a passing mention of the SEC, but this is
the answer to the question):

 _Ratings by NRSRO are used for a variety of regulatory purposes in the United
States. In addition to net capital requirements (described in more detail
below), the SEC permits certain bond issuers to use a shorter prospectus form
when issuing bonds if the issuer is older, has issued bonds before, and has a
credit rating above a certain level. SEC regulations also require that money
market funds (mutual funds that mimick the safety and liquidity of a bank
savings deposit, but without FDIC insurance) comprise only securities with a
very high rating from an NRSRO. Likewise, insurance regulators use credit
ratings from NRSROs to ascertain the strength of the reserves held by
insurance companies._

Source:
[http://en.wikipedia.org/wiki/Nationally_Recognized_Statistic...](http://en.wikipedia.org/wiki/Nationally_Recognized_Statistical_Rating_Organizations)

------
BonoboBoner
Two things make them powerful:

\- The vast amount of people that simply believe the opinions published by the
agencies and consider those the absolute truth

\- originators of policies that requires ratings to be put on several
financial products before being allowed to be bought by certain institutions,
which glorifies the agencie's opinions as the absolute truth

------
acg
It seemed to me that the market had already begun to move against Greece. If
credit agencies don't reflect the lack of political momentum (and a plan to
pay creditors) then agencies loose their credibility.

I doubt that S&P acts in an isolated manner, and is part a political play and
can be influenced by other organisations, economic reports and political
moves. This may even be a mechanism to sell the bailout to the German
electorate.

------
ErrantX
(this is a bit tongue in cheek but..)

Is there any more powerful and feared financial reporter in the UK than Robert
Preston?

The guy - who's essential task is to report on the comings and goings of
financial institutions so the rest of us can understand - materially
contributed to public panic during the banking crisis of last year.

At the time his doom and gloom reporting on national television caused many
uninitiated people (in the UK) to panic about the state of the economy; when a
more rational response would have been better.

Peston may claim he is only reporting the facts; but his treatment of Northern
Rock may well have helped push things over the edge.

Perhaps I am being over zealous in giving Peston some of the blame. Who knows.

[In all seriousness, though, Peston has a history of disliking almost all
financial institutions for some reason - and as a result the BBC reporting of
the banking crisis was both skewed and problematic. I know quite a few people
who misconstrued things from the tone and delivery of information and as a
result panicked like crazy.

He may have the makings of a point here; but I always take his opinions with a
pinch of salt :) ]

~~~
arethuza
He was certainly rather negative about RBS, HBOS and Northern Rock - but
didn't they rather deserve it?

I would rather think the management of Northern Rock caused the run - Peston
was just doing his job by reporting it. This might not have been the
traditional British way of dealing with these kinds of things but personally
I'd rather know that have it all covered up.

~~~
ErrantX
I think he let his bias speak alongside the facts; the reporting at the time
(especially on TV) was a little misleading.

------
VBprogrammer
Ratings agencies must be the most easily forgiven part of the financial
system. Why do the markets still move on their advise given that they were
proved completely falable less than 12 months ago!

------
fleitz
It's about time the ratings agencies started rating debt accurately. EU states
have some very serious debt problems.

~~~
VBprogrammer
As does most of the western world.

~~~
riklomas
As does most of the world.

[https://www.cia.gov/library/publications/the-world-
factbook/...](https://www.cia.gov/library/publications/the-world-
factbook/rankorder/2186rank.html?countryCode=#)

~~~
sailormoon
That graph is a little misleading. For example, Japan is right up there but
the majority of their government's debt is internal; not good by any means but
not as volatile as the Greek situation. Worst comes to worst, the Japs can
just print money on demand - in fact I think there has come to pass a tacit
understanding that that is exactly what will happen, as there is no chance of
the money ever being paid off by any other means. The Greeks have no such
luxury.

I'd like to see a ranking of countries by external public debt.

