Citizens for Strength & Security

Oct 1 2015

The Rating Agencies: Are They Doomed?

financial-economics

The rating agencies have an interesting and distinguished history. I first focused on them when working for the Chicago Mercantile Exchange. We needed the permission of Standard and Poors Corporation to use their stock index to price our futures contract when it settled. Looking back at S&P’s decision to go forward, it represented a watershed moment for the agencies.

What they did before that moment was judge the quality of corporate bonds. As we learned at dinner on the night that agency/exchange agreement was signed, that was a process that called for more than the manipulation of numerical data. Interviews with Chief Executives that called the character of these executives into question could affect ratings negatively. There was human judgment involved.

How dramatically their role has changed in the 25+ years since S&P decided to set a price with the simple release of a number produced by a computer! Today, the release of numbers generated by computers has become the principle business of the rating agencies. A major reason for this development was the enormous increase in the number of securities the agencies have been asked to rate,