Tuesday, June 23, 2009

Triple A Punt - Credit Rating Agencies

The Wall Street Journal's opinion page argues that the Obama administration has left the ratings agencies pretty much unscathed in the round of new regulations for the finance industry.

I'm inclined to agree that a lot of the problems that we have faced in the past year or so have been due to a reliance on the three ratings agencies, who occupy a position of government mandated supremacy. Pension funds, endowments and other regulated investment entities like being able to delegate credit screening to these credit agencies - they don't have to do the credit screening themselves.

Now it turns out that S&P is planning to use the CDS market to help set their ratings. In effect they are going to take a clean market signal and repackage it as a noisy, infrequently updated credit rating.

As the CDS market providesan instantaneous market assessment of risk, the role for credit rating companies should be limited - except for the fact that they have a government mandate.