Comments on: In Defense of the Rating Agencies — III http://alephblog.com/2008/08/23/in-defense-of-the-rating-agencies-iii/ Helping Institutions and Ordinary People Invest Better by Focusing on Risk Control Sun, 12 Feb 2012 22:02:53 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Terryhttp://alephblog.com/2008/08/23/in-defense-of-the-rating-agencies-iii/comment-page-1/#comment-18406 Terry Sun, 24 Aug 2008 15:00:58 +0000 http://alephblog.com/?p=844#comment-18406 I believe that ratings agencies can perform a valuable service for investors, especially in assessing highly complex securities derivatives. OTOH, they can be (and seemingly have been) part of deceptive marketing schemes--maybe unwittingly--by dealers to minimize the risk of these derivatives. I think the proper solution for such a situation is to make the ratings agency financially liable for the ratings they provide. If an "AAA" derivative turns out to be junk, allowing the rating agency to change its view in a timely manner, the buyers of the security should be compensated by the ratings agencies (& maybe the dealers) for their failure. This would have two salutory effects: 1. There would be fewer errors and oversights in rating agency models. 2. The ratings agencies would be fairly (and more fully) compensated by the dealers for the value-added of their ratings. I believe that ratings agencies can perform a valuable service for investors, especially in assessing highly complex securities derivatives. OTOH, they can be (and seemingly have been) part of deceptive marketing schemes–maybe unwittingly–by dealers to minimize the risk of these derivatives.

I think the proper solution for such a situation is to make the ratings agency financially liable for the ratings they provide. If an “AAA” derivative turns out to be junk, allowing the rating agency to change its view in a timely manner, the buyers of the security should be compensated by the ratings agencies (& maybe the dealers) for their failure.

This would have two salutory effects:
1. There would be fewer errors and oversights in rating agency models.
2. The ratings agencies would be fairly (and more fully) compensated by the dealers for the value-added of their ratings.

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