Stop persecuting ratings agencies
May 01, 2008
Nothing about this financial crisis is their fault. Disingenuous banking and lazy investors are the problem
If parliament and the mainstream media were to be believed, ratings agencies are solely responsible for the world's economic woes. By irresponsibly providing triple-A ratings to products backed by dodgy assets, they have spooked investors, provoked a credit crunch, and prompted a recession. Or so the argument goes.
But of the complaints levelled at the ratings agencies, few are justifiable. Were ratings inaccurate? No. Moody's downgraded $75.9 billion of asset-backed collateralised debt obligations (CDOs) in 2007 but gave a true picture of the likelihood of these CDOs defaulting from the available data. Was it misleading to give structured products and a treasury bills the same rating? Not if investors read the accompanying documentation and knew what they were buying. Were the ratings agencies impenetrable fortresses of mysterious methodology? Hardly.
The ratings agencies are guilty of little more than being easy targets. Some investors have been lazy and stopped questioning...
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