Mission impossible for ratings
The US Securities and Exchange Commission is soliciting views on how to reform the credit rating process to minimise conflicts of interest and assure higher-quality ratings. But this exercise is based on an erroneous view of the possible, argues David Rowe
It is widely recognised that credit rating agencies failed miserably in their mission to provide credible evaluations on the quality of highly structured residential mortgage-backed securities. Many argue this failure was a direct result of conflicts of interest inherent in the ‘issuer pays’ structure of the rating market.
While there is an element of truth in this view, it fails to capture the
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