Bond Rating Services

Credit Rating Agencies (CRAs) - Need for Reform

1. Crisis - Spotlight on credit rating agencies

"The rating agencies use their control of information to mislead investors into believing that the pig is a cow and a rotten egg is a chicken roast. Collusion and misrepresentation are not elements of a real free market "- U.S. Congressman Gary Ackerman

The smooth functioning of global financial markets depends in part upon reliable assessments of investment risks and the rating agencies play an important role in enhancing investor confidence in these markets.

The harsh rhetoric well above invites us to concentrate our focus on the functioning of credit rating agencies. Recent debacles as outlined below it is even more important to consider the application of rating agencies as assessors fair.

i) Sub-prime crisis in the recent subprime crisis, rating agencies were criticized for their collusion in favorable growing hidden junk rating CDOs in the subprime crisis that is currently having worldwide implications. To give some experience, the originators of mortgages were guilty of packaging sub-prime as securitization, and market them as CDOs on the secondary mortgage market. Credit rating agencies have failed in their duty to warn the world that financial misconduct by an equal and transparent. Shockingly, they gave favorable ratings to the CDO for reasons that must be considered.

ii) Enron and WorldCom: These companies were rated "investment grade" by Moody's and Standard & Poor's, three days before they went bankrupt. The rating agencies have noted a positive risk products, and in some cases make these products at risk and for the costs of fat.

There may be other over-rated Enron and WorldCom bankruptcy waiting. Rating agencies must be reformed so that they can pin-point cancer, although in-front and increase security in the financial markets.

2. Credit ratings and rating agencies

i) Credit rating: a structured methodology to rank the creditworthiness of roughly one entity, or credit commitment (eg a product) or debt or debt securities of such issuer and a an obligation.
ii) Credit Rating Agency (CRA) is a specialized agency in the work of classification above. Ratings agencies' ratings are not recommendations to buy or sell securities, but only one indicator.

Notes can be divided into
i) solicited Note: if the rating is based on a request to say a bank or a company which also participates in the rating process.
ii) unsolicited Note: When the rating agencies claim at the rate of an organization in the public interest.

Rating agencies help achieve economies of scale because they help avoid investments in tools and internal credit analysis. It also allows for market intermediaries and retail investors to focus on their core competencies leaving the complex notation reliable employment agencies.

3. The rating agencies note

Agencies that assign credit ratings for corporations include

AM Best (U.S.)
Baycorp Advantage (Australia)
Dominion Bond Rating Service (Canada)
Fitch Ratings (U.S.)
Moody's (U.S.)
Standard & Poor's (U.S.)
Pacific Credit Rating (Peru)

4. The rating agencies - Power and Influence

market players who use and / or are affected by credit ratings are



a) Issuer: A good credit rating improves the quality of issuers and market prices which in turn satisfy investors, lenders and other counterparties involved.
b) Business Buy-Side: the buy-side firms such as mutual funds, pension funds and insurance companies use credit scores as o.