Entity Types

Ratings Agency

Credit Ratings Agencies review and rate bonds based on the creditworthiness of the issuers

  • Ratings typically range from AAA (The best) to D (the worst)
  • In the early 1900s investors subscribed to ratings agency services
    • Ratings agencies provided a 3rd party objective view of a company's credit quality
  • In the 1970s ratings agencies became less impartial
    • They started to charge companies for ratings( improper incentives)
      • Companies would get lower borrowings costs with better ratings
      • Since they were paying ratings agencies, they could demand better ratings (or could go use another ratings firm)
    • The SEC let Financial Institutions hold less bond capital if the bonds were rated highly¬†
      • Now financial institutions were also incented to make sure ratings were high
    • By the late 2000s, ratings agencies were not giving impartial ratings
      • May have helped cause the mortgage meltdown
      • Proven via emails in Court
      • Ended up settling and paying Billion+ Fines

Ratings Agency Criticisms

  • They tend to paint a better picture than reality:
  • They may be incentivized to give higher ratings, or lose business to other firms who will