Credit Rating Agency Conflicts

A Credit Rating Agency Reform Act was passed in 2006. Nevertheless, much was left to be done to correct problems in the credit rating industry, as evidenced by the recent financial meltdown. This may have been one of the key causes of the debacle, not Wall Street “greed” so much popularized by the media.

The bulk of credit ratings are done by Moody’s, McGraw-Hill’s S&P, and Fitch Ratings, the three largest of just a handful of government-approved services.

Critics say they did poor evaluations of credit-default swaps and subprime debt issues. And thus contributed, to a great extent, to the financial downturn. There were also charges of conflicts of interest. Payments for ratings are made by firms who sponsor the evaluations. That is, those who issue the debt obligations.

The solution? What is needed is more competition. That means more credit evaluation services being recognized by our regulators.

And of course, more diligence by borrowers. That would be the ideal way to prevent serious credit rating problems from developing again.