A New Business Model Emerging for Ratings Agencies

January 10, 2011 by · Leave a Comment
Filed under: The Rating Agencies, The Ratings System 

The credit rating agency Realpoint is considering whether to begin offering unsolicited ratings. Their intention is to sell ratings and analysis on a fee basis to investors.

Daniel Indivigilo of The Atlantic believes that serious issues need to be resolved. First is whether investors will have an appetite for unsolicited ratings. Fund managers are supposed to be the expert. Hiring an outside agency could make them look bad.

Second, Mr. Indivigilo writes, the rating agencies, Realpoint included, have trouble keeping their best analysts. They are quickly lured away by investment banks and hedge funds that can offer better compensation. To pay these talented employees, a competitive wage may cause fees for unsolicited ratings to be unfeasible if the volume doesn’t materialize, particularly in situations where the issuer is offering his or her own assessment at no cost.

Mr. Indivigilo concludes by saying that in theory unsolicited ratings are “a great thing to provide more perspective on the market and various securities,” but he cautions that “a bumpy road lies ahead.” This is how it is supposed to work. Let’s let the capital markets figure out the best architecture for rating investments. Government-imposed structure won’t be optimal.

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