S & P President’s Letter to the Editor
Interesting commentary from Deven Sharma, president of Standard and Poor’s. Say what you will about the rating agencies and their role in contributing to the credit crisis (we would agree with much of the finger pointing, although certainly not all of the blame goes to them), but he makes some good points about the REASON ratings should be used. More specifically, he makes the case that ratings should be used because the market finds value in them, not because government / regulatory language mandates it. Given the events of the past two years, institutions should be decreasing, not increasing, their reliance on ratings. And they should certainly have the choice to do so. Anything else, such as government mandated reliance on third-party ratings, presents a prime opportunity for poor assessment of the true value of securities (“market value” becomes misaligned with true economic value) – overstating market value when a security gets a “clean” bill of health and understating it when a security is downgraded to “junk” status. This again highlights the issue of why marking-to-market does not always represent true economic value for investors. Third-party ratings are a pervasive reason this misalignment exists! Check out some of the resources on this website to learn more about this disconnect and how third-party ratings contribute to it.
Why Rating Requirements Don’t Make Sense – StandardandPoors.com, January 19, 2010
