We need to be clear about what traditional ratings do and don't do. Increasingly people have inferred more than what was intended to be conveyed.Some of the most valued and respected Credit Rating Agencies (CRAs) like Moody's, Fitch, and Standard & Poor's are under regulatory scrutiny for their failure to send off adequate signals about the impending subprime crisis and downturn of related products. In fact, this is not the first time their reputation has been at stake. Many investors have lost significant amounts of money, thanks to the great faith investors have reposed in these rating agencies. On the other hand, rating agencies derive their revenues mostly from the companies they rate, and this leads to a certain amount of conflict of interest.
There has been growing criticism of the practices of CRAs, as experts feel that being into the sole business of grading funds of investment grade, they should have seen the crisis coming and rung the warning bells in advance. Experts say, "A lesson from the present crisis is not to blindly rely on the ratings and invest. What is ideal and reiterated time and again is to diligently examine one's investment and do one's research before investing."
Concerns
about their integrity have been gathering momentum in the
world of finance for a long time now. The international financial
community has started questioning the disproportionately dominating
role of CRAs in the subprime crisis and the resultant credit
crunch. They are supposed to assign grades to financial products
based on the perceived risk of default. CRAs like Standard
& Poor's, Moody's and Fitch Ratings gave gold-plated AAA
credit ratings to complex structured products like Collateralized
Debt Obligations (CDOs) and Residential Mortgage-Backed Securities
(RMBS), indicating that they were as secure as government
bonds. Investors were led to believe they had trustworthy
portfolios; later only did they realize that they were actually
sitting on massive losses. |
