Friday, March 14, 2008
Rating Agency Monopolists
"If S&P and Moody's are no more to be trusted than other issuers of private opinions, they will soon have the reputation that the public gives to journalists, and their opinions will also be worth five bucks a week. ... They're profit-making (they hope) companies that charge bond issuers substantial fees for evaluating investors' risk that may be entailed in the bonds. They're not unlike bond insurers, except that they don't put their capital behind their opinions. ... The [SEC] doesn't stand behind the varacity of the filings of registered corporations. The SEC simply files corporate paperwork and leaves to investors the responsibility to read the numbers and question them. ... In fact, the SEC should bear a special responsibility in the current crisis, having conferred special staus on Moody's, S&P and Fitch as [NRSROs]. At the end of last year, the SEC finally decided to let competitors into the field, including the smart, aggressive and timely Egan Jones, which charges fees to investors, rather than to issuers. ... The SEC would have done better to get rid of the whole idea of Nsros, and institutional investors would do better to rely on their own reserarch", Thomas Donlan at Barron's, 3 March 2008.
I agree with Donlan. It's more than time the NRSRO designation ended.