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Feature: The value of an opinion
26 August 2010
The credit crisis exposed serious systemic flaws in the processes and business models of the credit rating agencies. Since then, the agencies have undergone reforms, driven internally and now from the regulators too. So, what has changed?
The credit rating agencies (CRAs) were among the first in the financial sector to be fingered as culprits for the credit crisis. The criticisms are well known: they failed to predict the downturn in the US housing market; they assigned triple-A ratings for mortgage-backed products that were riddled with bad loans; their business model suffered from the fundamental conflict of interest of having issuers pay the agencies to rate their CDOs; and, most damning of all, the agencies negotiated with issuers on how to structure their debt instruments so as to obtain triple-A ratings.Structured products aside, the creditworthiness of a company is core business for CRAs, but even here protests have been raised about how, for example, Enron was A-rated just days before it went bust. Accusations of being too slow in reflecting market knowledge have recently been followed by accusations from the EU regulators that Standard & Poor’s decision...
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