Ratings Agencies: Gatekeepers or Toll Collectors?
The sentiment was echoed across at least fourteen states with Illinois, Connecticut, Mississippi, Arizona, Arkansas, California, Delaware, the District of Columbia, Idaho, Iowa, North Carolina, Maine, Pennsylvania, Missouri, Tennessee and Washington filing suits against S&P.
The federal civil suit against S&P claims damages of $5B. There has been no word on whether similar suits will be filed against other rating agencies.
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Does the Spotlight Change the Art?
The age-old argument of whether art imitates life or the opposite, plays into this discussion in an interesting way.
Christopher Matthews, Times columnist, touches on the role and weight given to credit agencies in his article, “Justice Sues S&P; Is It Time to Rethink the Role of Ratings Agencies?” Mathews cites a study by San Diego Law School professor Frank Portnoy that found that the federal government started incorporating rating agency reports into rulemaking starting in the 1930’s. And then, in 1973, the SEC took the ratings game one step further by designating specific firms as “Nationally Recognized Statistical Ratings Organizations.” Matthews notes, “Predictably enough, it was right around this time that the ratings agencies shifted their business models from charging investors fees for their reports, to charging issuers for being rated.”
In her article, “Sue S&P, Sue Everybody”, Forbes columnist Lara Hoffmans expounds the theory (and focuses the blame) to Congress as a whole. Says Hoffmans, “[Congress is] directly responsible for the laws requiring major debt issuances to have at least one rating from a rating agency the government certifies as “credible.”
Could it be that rulemakers, in trying to protect Americans by championing independent rating agencies, may have inadvertently incentivized the rating agencies to be less independent? The months ahead promise a deep dive into the issues at hand, at the state and federal level, and from commentary left, right, and center. Heads up, social innovators, stay in the conversation.