Everyone knows, or at least should know, that the “Big 3” rating agencies that rate about 98 percent of all debt all issue trash ratings. Here’s the background on how that happened.
Rating agencies used to get paid by investors on the basis of how well they did at estimating the likelihood of default. The better your ratings, the more sought out your opinions.
In the mid 1970s, the SEC created nationally recognized statistical ratings organizations (NRSROs). Following that idiotic regulation, the rating agencies got paid on the basis of how much debt they rated, not how accurate their ratings were. Fees come from corporations issuing debt, not investors seeking true default risk.
The more stuff you rate AAA, the more business you get from companies who want their debt rated. The new model is ass backward, and why ratings are trash. A genuine fiasco happened with ratings during the Great Financial Crisis with tons of garbage rated AAA went to zero.
There should not be NRSROs. The SEC made matters much worse, except of course for the Big 3 who have a a captured, mandated audience, coupled with massive conflicts of interest.
Author(s): Mike Shedlock
Publication Date: 5 Aug 2023
Publication Site: Mish Talk