Why Do They Still Trust Standard & Poor’s Ratings
Standard & Poor’s (S&P) rates borrowers on a scale from AAA to D – anything less than BBB is referred to as junk – the trouble is why on earth does anyone trusts their ratings –they gave triple A ratings to residential mortgage securities backed by sub-prime loans which precipitated the current banking crisis.
So how is it that S&P’s word on the quality of Greek debt, Portuguese debt and Spanish debt carries any credibility at all?
It’s curious, isn’t it?
What is extraordinary is that almost nothing has been done by governments, or central banks or regulators to break the de facto monopoly of S&P, Moodys and Fitch in the business of rating bonds.
There has been a good deal of talk about reforming the way they are remunerated, to end the apparent conflict of interest arising from the convention that they are paid by borrowers (who obviously want the highest possible rating for their credit).
But isn’t the real issue that the ratings troika doesn’t face any proper competition, thanks to the official endorsement the firms receive from central banks and regulators?
Wouldn’t it make sense for the Bank of England, the European Central Bank, the FSA, the SEC and so on to find other ways to judge the quality of the bonds that underpin their evaluations of banks’ financial robustness.
Perhaps I am being over-squeamish, but it doesn’t feel democratic or sustainable that the fiscal fate of nations and currency zones – and indeed the perceived strength of the financial system – rests on the analytical verdict of three private-sector research firms, the financial record of which has in recent years not been unblemished. Robert Peston, BBC.
So I ask again why do they still trust them?
Apr 29, 2010 1 Comment so Far

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