Friday, August 27, 2010

Just how low will credit ratings agencies go?

Credit ratings agencies are a protection racket. Issuers have to get a rating and at the same time, they have to pay the rating agency for it. If they don't pay then their rating will suffer, and this will cost the issuer.

Now the ratings agencies are worried about potential liability if they are wrong about their ratings. So they have added clauses to their ratings contracts requiring that the debt issuer indemnify them if they are sued. The self evident blog presents a couple of examples of this.

It would be one thing if the issuers had a choice about whether or not they could get a rating, but they don't. They have to participate in the protection racket. But now the local thugs are wanting the victims to pay their court costs as well.

There is a better way. One in which ratings are paid for by the bond buyer and where ratings firms don't have monopolies and are liable for their mistakes. Essentially a free market for ratings.