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Rating agencies

April 13, 2012 by · Leave a Comment 

More than 97 percent of the global ratings come from three companies that dominate the rating industry. They are Standard & Poor’s (S&P) owned by McGraw-Hill, Moody’s Investor Service and Fitch Ratings. They have an immense influence over the $40 trillion global debt market including corporations, sovereign, municipal and structured finance. A good example to show their influence is the down grade of the U.S. sovereign credit rating in August 2011 that resulted in $9.7 trillion loss in global equities for the last quarter of 2011.

They rate corporations, sovereign, municipal and structured finance. They analyze every new debt issue of the above for credit worthiness. Since no government wants to assume the responsibility of ratings, the big three holds enormous power and responsibility.

However, they are not immune to criticism. The big three rated the now bankrupt MF Global as investment grade a week before its bankruptcy filing which was unable to account for $1.2 billion of investor funds. Additionally, they rate banks, municipalities, and companies that pay for their service creating a conflict of interest. The Dodd-Frank financial regulations adopted by the U.S. set limits on activities of the rating agencies in order to address the conflict of interest issue.

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