EU Considers Banning Ratings Agencies From Warning That Countries May Be In Financial Trouble

from the head-in-the-sand-regulating dept

Ratings agencies, who rate the risk and financial viability of all sorts of debt products, were one of the major scapegoats of the financial crisis. A lot of people pointed the blame finger at them, noting that they rated all sorts of incredibly risky and often highly questionable financial instruments as being incredibly safe. And, it's absolutely true that they did a dreadful job. But, it's kind of ridiculous to blame companies for stating an opinion. On top of that, it's a basic free speech issue. You can't tell a company that it can't express an opinion on the financial soundness of something. To me, the real problem with the ratings agencies was that the government built them into the law. That is, the government required certain institutions to maintain specific percentages of "highly rated" bonds in order to engage in certain activities. That not only legitimatized the opinions of ratings agencies like Moody's and S&P, but it also gave those "opinions" much more of a feeling of fact, rather than opinion. Could you imagine if the government said movies could only be shown in theaters if the NYTimes and the Washington Post movie reviewers gave them positive reviews? That's what the law is basically like with ratings agencies.

And while I think that the big ratings agencies can make big mistakes, that doesn't mean the answer is to shut them up. However, some regulators in Europe disagree. They're discussing a plan to require agencies to not give out ratings, specifically on sovereign debt, which is where many of the key concerns are right now. With many countries in Europe facing serious debt problems (Greece, Portugal, possibly Spain and Italy among them), it seems like Europe has decided the best way to deal with the problem... is to stop people from talking about the problem.

It's difficult to think of a worse plan.

The defenders of the plan complain that S&P, Moody's and Fitch represent an oligopoly over ratings. And that may be true, but that's no excuse for stifling speech. The way to deal with an oligopoly is to add more competition to the market, rather than limiting what those companies can do... especially when it comes to things like expressing an opinion.

Filed Under: europe, free speech, rating agencies, sovereign debt
Companies: fitch, moody's, s&p

Judge Says Ratings Agencies Are Not Necessarily Protected By Free Speech

from the that-seems-bad dept

The big ratings agencies, Moody's and S&P have taken something of a beating for their role in the financial crisis -- often rating pure junk as if it were pure gold. But, of course, in the rush to find someone to blame legally, it made little sense to go after the ratings agencies. The real problem wasn't that the ratings sucked (they did), but that federal regulations gave those ratings power in the law. This made those ratings not only more important, but gave them an official "stamp of approval" such that people assumed (incorrectly, obviously) that they must be accurate. The idea that a small group of guys sitting in an office could more accurately rate the risk of debt over the actual market seems rather absurd -- and yet, we gave it the federal stamp of approval. Still, as bad as the ratings were, there shouldn't be any legal consequence for getting the ratings wrong. After all, unless there was evidence of outright fraud, the ratings are simply opinions, which are protected by the First Amendment... or so we thought.

In a ruling last week, a judge has noted that ratings agencies' ratings are not protected free speech if they're only disseminated to a small group of people, rather than the wider public. While the ruling cites a few earlier cases, I have to admit that I have trouble understanding this reasoning. I don't recall anything in the First Amendment that says the government can restrict freedom of expression if it's to a small group of people, but not if it's to a large group of people. This probably isn't a huge deal for the ratings agencies -- though, it will keep them busy with some lawsuits that may cost them some money. The bigger "problem" in the market came from relying on their public ratings -- and those should (still) be protected.

Filed Under: free speech, ratings agencies, wall street
Companies: moody's, s&p

Why Did We Put Ratings Agencies' Ratings Into The Law?

from the good-questions... dept

Problems and potential conflicts coming from the bond ratings agencies were well-known well before our financial crisis hit, but still many are pointing the blame finger at those ratings agencies. And, it's certainly tempting to do so. Just as with the famed financial analysts during the late 90s tech boom, the credit agencies appear to have rated certain debt offerings very highly, despite recognizing how intrinsically risky the investments were. Given what happened following the dot com bubble collapse, it's quite likely that the bond rating agencies Moody's and S&P will get slapped down for their "mistakes."

But that would be a mistake. Both Moody's and S&P were merely expressing an opinion on the credit-worthiness and risk of the various debt offerings. An opinion should never be considered illegal by itself. The problem was that people started relying on these opinions as if they were factual realities. And who's to blame for that?

Well, in part, it's the government -- which wrote the rating agencies' ratings into law, requiring certain regulated institutions to maintain a certain percentage of "highly rated" bonds in order to engage in certain activities. That made it so the real focus was on the opinions of Moody's and the S&P, rather than on what investors believed the actual risk was on those bonds. As the link here notes, why not let the market decide what the actual risk is on these bonds, rather than trusting the (somewhat questionable) opinions of individuals who are biased and conflicted?

Filed Under: ratings agencies, regulations
Companies: moody's, s&p

Are Moody's And S&P The New Blodget and Quattrone?

from the second-verse,-same-as-the-first dept

It's been said by many that bond ratings agencies are to the credit bubble what the tech analysts were during the dot com bubble. Whereas guys like Henry Blodget got dinged for touting IPOs for no other purpose than to move stock, many are wondering whether firms like S&P and Moody's inflated debt ratings so as to help move more business. It certainly seems plausible, and now it looks like regulators are going to delve deeper into this question, as they look at whether repeat customers tended to receive better ratings for the securities they were floating. Regardless of what regulators determine, it seems likely that the reputation of these firms will be permanently tarnished. Nevertheless, there would still seem to be a need for third parties to rate debt, so that the market can determine the appropriate interest rate. Of course, it's not like nobody saw this coming. For years now, people have been warning about the oligopoly in bond rating, and the potential for conflicts of interest. Perhaps the key is pursue a more decentralized system of disseminating information, although it will take some work (and regulatory flexibility) to figure out exactly what this model would look like.

Filed Under: credit, debt
Companies: moody's, s&p