Last December, Now On PBS ran an intriging piece on the role the credit rating agencies played in the housing bubble. The industry has been attacked lately over the poor quality of its ratings of collateralized debt obligations (more on these later). The way forward is not clear.
In a forthcoming white paper, Matthew Richardson and Lawrence White argue that “…financial regulation may itself be the root cause of the problem since the basis of the NRSRO’s authority as the central source of information about the creditworthiness of bonds decreases competition and incentives to innovation.” An NRSRO is a “nationally recognized statistical rating organization.” The SEC (they will appear quite frequently in these blogs I suspect) designates which organizations can be NRSROs. The top three rating agencies are: Moody’s Investor Service, Standard & Poor’s and Fitch Ratings.
Richardson and White note in The Rating Agencies: Is Regulation the Answer? that “by creating a category…of rating agency that had to be headed, and then subsequently maintaining a barrier to entry into the category, the Securities and Exchange Commission (SEC) further enhanced the importance of the three major rating agencies.”