“Can you rate me higher?” The power three agencies had over the market


When I was an intern this summer at Hess Corporation, I was a part of their Credit Risk team. I was tasked daily with updating our company’s systems whenever one of our company’s ratings were changed. I remember once I had to downgrade a major financial firm in our databases 3 pegs, from an A1 to Baa1, all because one rating agency felt that their second quarter numbers were very lacking and showed no signs of changing. I was like, “Man, this company is one of the biggest players on Wall Street, and this one agency had the power to downgrade them that much, WOW!” I was astounded by the power these rating agencies had one the system. I remember that day exactly because I had to change, in ALL OUR SYSTEMS, 15 major financial firms, 5 of which dropped 3 scores completely. My boss couldn’t believe when I showed him that we could only give them $500,000 after giving them over $1,000,000 for the past 10 years. He said, “Holy sh*t! Who can we really trade with these day?!”

https://i2.wp.com/www.cartoonstock.com/newscartoons/cartoonists/bro/lowres/bron2526l.jpg     https://i0.wp.com/www.publicserviceeurope.com/dyn-graphics/image-430/rafa-sanudo-cartoon-rating-agencies-triple-x.jpg

So, who are these credit rating agencies and why do they have so much power over companies? First off, a credit rating agency is a company that assigns credit ratings to corporations that issue certain types of debt obligations. Their ratings, therefore, determine how fast these companies can pay back the debt that they issued based on that agencies rating scale. In America, when you are discussing rating agencies, you have to discuss the Big Three; Moody’s, Standard and Poor’s (S&P), and Fitch Group. These three companies alone, combine hold 95% of the market when determining their credit scores. The problem with this  reliance on these three is, like with 2008 credit crisis, there is little competition over rating. So why is that a problem? Well, when you have more agencies researching the same companies, you get a clearer idea on how to rate them. In 2008, people believed these three agencies weren’t enough to address the highly toxic environment that was our banking system. Since then, the rating processes has been reexamined and improved upon to find a more clear and transparent criteria to judge risk with corporations that provide mortgaged-backed securities. They have begun, as I mentioned in my first hand experience above, to aggressively downgrade large amounts of these mortgaged-backed debts. They have also been improving on their internal issues; mainly more internal monitoring programs and third party reviews. These agencies have a major power in our economic structure, but it has been since 2008, when we truly recognized the power they have on Wall Street.

 

Advertisements

4 thoughts on ““Can you rate me higher?” The power three agencies had over the market

  1. I do agree that credit rating agencies had an extreme amount of power in our economic structure especially since 2008. However, I think credit agencies are mostly bullshit. They constantly have conflicting ratings and then proceed to give different reasoning as to why this is the case. I think that they are really just power hungry.

  2. I feel like rating agencies are an integral part of the whole system of checks-and-balances for Wall Street. People are supposed to be able to trust these ratings to allow them to judge a company’s financial position in order to make a good investment. Personally, I do not have a lot of faith in these agencies. The ratings of Enron and WorldCom prior to their bankruptcies did not capture their true financial position. Then again in 2008, the rating agencies gave high ratings to AIG and Lehmen Brothers, and we all know how those companies turned out.

  3. Isn’t there an inherent conflict of interest in that the agencies are paid by the firms they rate? Have we addressed that problem? And why can’t there be more firms? Who, exactly is a ratings agencies customer? How do they compete?

WHAT DO YOU THINK?

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s