Market Forces Begin To Challenge Rating Agencies’ Conflicts of Interest

September 13, 2011 by · Leave a Comment
Filed under: The Rating Agencies 

While the Dodd-Frank bill was being drafted, a proposal was made to remove the stigma of rating agencies’ conflict of interest by essentially assigning an arbitrary agency to evaluate each deal. The issuer could hire others to rate the offering, but would be forced to accept the arbitrary analysis. The idea died in committee, but there is evidence that market forces are leading to unsolicited ratings that may correct the conflict of interest.

The Wall Street Journal reported recently that both Moody’s Investors Services and Standard & Poor’s presented unsolicited appraisals of a mortgage-backed security that challenges Fitch’s Triple-A rating.

Daniel Indiviglio, writing for The Atlantic, believes this is good for two reasons. First it demonstrates that agencies are serious about creating a diversity of assumptions, and second it places greater burden of analysis on investors where he believes it belongs.

Mr. Indiviglio concludes, “This debate is very health [sic] for the market. It might make the process of selling certain securities a little harder, but the process should have been harder.”

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