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The independence of credit rating agencies : how business models and regulators interact. Responsibility Gianluca Mattarocci. Edition First edition. Physical description 1 online resource xxii, pages : illustrations. Online Available online. ScienceDirect Full view. More options.

The Independence of Credit Rating Agencies How Business Models and Regulators Interact - AbeBooks

Find it at other libraries via WorldCat Limited preview. Gianluca , author. Bibliography Includes bibliographical references and index. Contents Rating agencies and the rating service Rating and financial markets The rating market Economic and financial equilibrium of rating agencies Rating agencies' pricing policies Organizational structure and rating agency independence The economic independence of rating agencies.

Summary The Independence of Credit Rating Agencies focuses on the institutional and regulatory dynamics of these agencies, asking whether their business models give them enough independence to make viable judgments without risking their own profitability. Few have closely examined the analytical methods of credit rating agencies, even though their decisions can move markets, open or close the doors to capital, and bring down governments. The financial crisis highlighted their importance and their shortcomings, especially when they misjudged the structured financial products that precipitated the collapse of Bear Stearns and other companies.

However, the financial engineering behind these investments made them harder to understand and to price than individual loans. To determine likely returns, investors had to calculate the statistical probabilities that certain kinds of mortgages might default, and to estimate the revenues that would be lost because of those defaults. Then investors had to determine the effect of the losses on the payments to different tranches.

Archived from the original on October 17, Bush in July to a five-year term. Critics say this created perverse incentives such that at the height of the credit boom in to , the agencies recklessly awarded Triple A ratings to complex exotic structured instruments that they scarcely understood.

They have profited handsomely.

Regulatory Regimes and Liability Issues

Today [] expressions of concern about rating performance — how good the rating agencies are at their business — have become the norm. Newspapers, magazines, and online sites talk continuously about the agencies and their failings. Tulsa World. The concern of the Justice Department's antitrust division was that unsolicited ratings were, in effect, anticompetitive. Huff Post. Retrieved 4 September Investors, including public pension funds and foreign banks, lost hundreds of billions of dollars, and have since filed dozens of lawsuits against the agencies.

The Bond Buyer. CGFS Papers. Committee on the Global Financial System. July Bloomberg Businessweek. Retrieved 5 November In October , the M4-M11 tranches [on one subprime mortgage backed deal the FCIC followed] were downgraded and by , all the tranches were downgraded. Essvale Corporation Limited. Academic Press. Mishkin; Eugene N. White Centre for Economic Policy Research.

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International Monetary Fund. October Adrienne Heritier ed. Internal and External Aspects of Corporate Governance. Regulating Wall Street. New York University. Retrieved 11 October Portfolio Penguin. According to the theoretical literature, CRAs potentially provide information, monitoring, and certification services. First, since investors do not often know as much as issuers about the factors that determine credit quality, credit ratings address an important problem of asymmetric information between debt issuers and investors. Hence, CRAs provide an independent evaluation and assessment of the ability of issuers to meet their debt obligations.

In the late s and early s, raters began to charge fees to bond issuers to pay for ratings.

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October 27, Archived from the original PDF on 14 December Retrieved 30 November The Economist. It is very hard to see how this combination can be justified. Imagine if patients were forced to use doctors whose incomes depended on the pharmaceutical companies, but who were immune from lawsuits if they prescribed a toxic drug. Wiley Finance. The Wall Street Journal. US Government Printing Office. Financial Markets and Institutions. South-Western Cengage Learning. Bloomberg Markets Magazine. Retrieved 27 August Brown An Introduction to the Bond Markets. Yescombe The Chicago Tribune.

Kent Baker; Gerald S. Martin United States Senate. May 24th, Center for Financial Policy. Retrieved 17 December A more recent example is the regulation allowing pension funds to invest in asset-backed securities rated A or higher. The New Masters of Capital. Cornell University. Sy All the Devils Are Here. The agencies had charts and studies showing that their ratings were accurate a very high percentage of the time. But anyone who dig more deeply could find many instances when they got it wrong, usually when something unexpected happened.

The rating agencies had missed the near default of New York City, the bankruptcy of Orange County, and the Asian and Russian meltdowns. They often downgraded companies just days before bankruptcy — too late to help investors. Archived from the original pdf on New York Times. Archived from the original on 17 July Management stayed the same. Moody's stock price, after a brief tumble, began rising again February 6, US SEC. Retrieved 21 August International Herald Tribune via Internet Archive. Archived from the original on February 12, Retrieved August 6, WW Norton and Co.

The quality of corporate credit rating: An empirical investigation. European Financial Management Association. Australian Financial Review. Fairfax Media. Retrieved 23 February Australian Securities and Investments Commission. February Asian Development Bank Institute. Financial Stability Forum. University of Maine. Archived from the original pdf on 14 December Washington University Law Review.

University of Washington. Archived from the original on 14 December Library of Congress. Fabozzi; Henry A. Davis; Moorad Choudhry Introduction to Structured Finance. Finance in Asia: Institutions, Regulation and Policy. Upstart Business Journal. American City Business Journals. Retrieved 19 November All the Devils Are Here , p.

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Coval; Jakub Jurek; Erik Stafford Harvard Business Review. Global Securitisation and Structured Finance Greenberg Traurig. International Organization of Securities Commissions. May Haslett Jr. World Bank Publications. Participants in the securitization industry realized that they needed to secure favorable credit ratings in order to sell structured products to investors.

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  6. Investment banks therefore paid handsome fees to the rating agencies to obtain the desired ratings. Originally aired Retrieved 3 September Ceyla Pazarbasioglu: This number doubled since It accounted for pretty much all of Moody's growth. The original bonds Ratings arbitrage, Wall Street called this practice.

    Credit rating agency

    A more accurate term would have been ratings laundering. They bear a lower credit rating triple B. This is what Goldman Sachs had cleverly done. The buildings occupied the same floodplain; in the event of flood, the ground floors of all of them were equally exposed. Retrieved Portfolio, Penguin.

    What caused Moody's to change were three things. The three credit rating agencies were key enableers of the financial meltdown Retrieved June 5, May force us to do moddyfitch only All the time. I mean, they would threaten you all of the time Hill University of Pittsburgh Law Review. University of Pittsburgh. World Bank. Nelson 31 January Congressional Research Service. DNB Working Paper. De Nederlandsche Bank. Archived from the original pdf on 4 March In Robert Kolb ed.

    Sovereign Debt: From Safety to Default. Indian Institute of Management. Retrieved 9 June Jackson Regulating Financial Services and Markets in the 21st Century. Hart Publishing. The World Bank. Oxford University Press. Herring; Robert E. Litan, eds. Skeel Hawley; Shyam J. Kamath; Andrew T. Williams, eds.

    University of Pennsylvania Press. December Deutsche Welle. Retrieved 16 December Financial News. Retrieved 13 May Financial Times. Market News International. Bangladesh Securities and Exchange Commission.

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    Archived from the original on Hong Kong Securities and Futures Commission. Credit Research Initiative. United States Government Accountability Office. London School of Economics. September In some countries, credit rating agencies are starting to provide other types of services, including credit reporting serv-ices. The Economic Times. Historical evidence" PDF. Journal of Financial Economics. A Century of Sovereign Ratings. Financial Services Authority. The World Bank Group. Securities and Exchange Board of India. Financial Post. Deutsche Boerse Group.

    The Guardian. Retrieved 10 May November 23, Bank of England. Nicolas J.

    Problems With Credit Rating Agencies

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