Comments on: Start a Rating Agency, Why Don’t You?

By: David Merkel

David Merkel — Wed, 07 Jan 2009 19:21:22 +0000

The more rating agencies the better, though the market could only fund so many.

My view is that the rating agencies can’t handle new asset classes, and so regulated institutions should not be allowed to hold those assets until the asset class has gone through market failure once.

The rating agencies do pretty well once they have a full cycle of loss statistics to work with.

By: matt_swansojeiker

matt_swansojeiker — Wed, 07 Jan 2009 18:50:43 +0000

Great points. Do you think that another problem with our current system is that there are so FEW recognized rating agencies given what they’re tasked to do? It’s my impression that Moody’s and S&P are really the only games in town (Fitch as a distant 3rd) and thus the disruption to the market when their models get it wrong is so much more amplified……

By: David Merkel

David Merkel — Wed, 07 Jan 2009 17:09:58 +0000

The difficulty is the same as SFAS 157 — for many of the bonds determining the price is tough. Most bonds do not trade often, so do you price them by a formula? Whose formula? Perhaps one devised by the regulators or a third party, like Bloomberg?

Even then, some small amount of the bonds no formula can price well…

I’d be willing to try it as an idea, but there would be significant bugs to work through.

By: Robert

Robert — Wed, 07 Jan 2009 12:40:26 +0000

I saw an editorial (in the WSJ I think) that had an interesting proposal – use the yield spread over treasuries to determine fixed income risk, not agency ratings. Although the market will occassionally overreact, it generally gets it right on average.

Rating agencies can still exist to set benchmarks and give investors the big picture view about risk, but the market would set the final price.