An Update: On Credit Rating Agencies

On 19 January 2012, I published a post of the credit rating downgrades. In it, I mentioned some of the issues that surround the Ratings Agencies and their independence.

The real problem is that the Ratings Agencies are paid by the companies that they are meant to be rating. Far too often, a company's rating will remain unchanged until mere days before it files for bankruptcy.

Is this always the Ratings Agency's fault? Possibly not. Maybe things were cool at the last ratings' review. But still - there should be some safeguards in place. Auditors, for example, face a similar independence issue. And their safeguards include:

1. Companies are required by most countries' laws to disclose the full amount of their audit fee. 
2. Auditors are heavily regulated by legislation.
3. Audit firms are punished by the public when they get it wrong. When Enron happened, Arthur Anderson dissolved. There is limited room for audit error.

And the Ratings' Agencies? They usually just state that their fee was "normal and in line with industry practice". Not exactly definitive on the numerical front. And for the most part, Ratings' Agencies are unregulated. And finally, when they get it wrong, they just get it wrong. And continue. 

Does nobody recall the complete farce of the Subprime Crisis? And yet here they are, the same people, downgrading Greece.

Something ought to be done.

This post has been sparked by this article: http://www.bloomberg.com/news/2012-02-03/mf-money-mystery-is-how-much-it-paid-moody-s-commentary-by-jonathan-weil.html