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It is better to be always Wrong than sometimes Right: The Rating Agency Paradox

October 13, 2011

It is better to be always Wrong than occassionally Right

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From → Credit Analysis

3 Comments
  1. Hi Conrad,

    I agree with this. But are the investors following the credit ratings of the big agencies still so blindly? I am wondering why there still is no pressure nor obligation for the credit agencies to clearly communicate and publish their rating methodologies and sources. With more transparency, investors would be able to assess the ratings; I know, this might sound strange to have to “rate the ratings”, but wouldn’t this be an option?

    Thanks
    Erwan

  2. Hi Erwan

    Good to have your thoughts. But have the investors really stopped relying on the rating agencies? Witness the big market reactions whenever a sovereign/mega bank is downgraded. And rating agencies provide a good cover against lawsuits for institutional investors such as mutual funds. So, if there were no rating agencies, institutional investors would find the need to invent them to provide a shield against their institutional incompetence. I guess only investors like family houses, sovereign wealth funds etc can take the lead against relying on the agencies.
    regards
    conrad

  3. Hi Conrad,

    Yes, this is exactly the point: how can it be that investors still rely so much on credit ratings from the same agencies which are criticized for having issued wrong or overrated credit assessments on structured products, banks and even sovereign debts (see Greece)?? Even governments are not able to regulate the credit rating industry in order to prevent conflict of interests, and the rating issued by the big threes are still considered as holy words by most of the finance institutions…

    I just don’t understand how this can be, and why there is no independent institution, or group, or community of worldwide experts reviewing the ratings issued by the agencies and providing transparent rating methodologies and identified sources of information.

    This is exactly what we want to introduce with our wikirating project. At least, an alternative that would allow investors and finance institutions to compare independent and individual ratings with the ones issued by the well established and still respected rating agencies.

    Regards
    Erwan

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