Monday, February 25, 2008
Rating Rating Agencies
The US stock market rallied today.Mostly on the back of Ambac retaining it's triple A rating,and MBIA being taken off the downgrade sick list.Ambac's trying to raise 3$ billion to bolster it's capital base.
Phew,panic over then,things can return to normal.No more write downs,and the credit market will return to normality very soon.
Nah just kidding.Here's the problem.Ratings agencies earn their revenues from the bond issuers.They get a fee to provide the the rating from the issuer.This is called conflict of interest.Let me illustrate you how this might be a problem.Remember Enron? Weeks before it went bankrupt these very same ratings agencies were assigning them healthy credit ratings.
I suspect they will have to downgrade the monolines,it's just a matter of when.
Phew,panic over then,things can return to normal.No more write downs,and the credit market will return to normality very soon.
Nah just kidding.Here's the problem.Ratings agencies earn their revenues from the bond issuers.They get a fee to provide the the rating from the issuer.This is called conflict of interest.Let me illustrate you how this might be a problem.Remember Enron? Weeks before it went bankrupt these very same ratings agencies were assigning them healthy credit ratings.
I suspect they will have to downgrade the monolines,it's just a matter of when.
