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An Assessment of the Credit Rating Agencies
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An Assessment of the Credit Rating Agencies

Background, Analysis, and Policy

Lawrence J. White
Mercatus Center, 2013
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Editorial Rating

7

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  • Analytical
  • Background

Recommendation

Stern School of Business professor Lawrence J. White outlines the history of credit rating agencies (CRAs) and traces related federal legislation from the establishment of the Securities and Exchange Commission in 1930 onward. White contends that intertwining bond ratings with “regulatory reliance” has been disruptive and that CRAs meet no current market need. His paper, issued by the conservative Mercatus Center at George Mason University, says improved models could foster competition. White’s contrarian views on the drawbacks of the present regulatory environment carry weight, but likely would not win approval from reigning experts. getAbstract believes that bondholders and traders who are interested in an out-of-the-box analysis from the right-hand side of the economic-thought spectrum will find this an intriguing, contrary read – as will others who wonder what happened to real estate values in the first decade of the 21st century.

Summary

Credit Rating Agencies

Bond markets rely on major credit rating agencies (CRAs) to rate the likelihood that an issuer will repay a bond using letter-scale classifications from “AAA” (Terrific) through “D.” The “Big Three” bond credit raters are:

  1. Moody’s Investors Service Inc. – With total sales of $2.8 billion and assets of $4 billion, Moody’s maintains ratings on nearly one million issued bonds.
  2. Standard and Poor’s Rating Services – The firm is linked with McGraw Hill Financial and had “revenues of $850 billion” in 2012.
  3. Fitch Ratings – With revenues of $732 million, Fitch rates bonds in 150 countries and has offices in 50 of them.

Below the major rating agencies come several minor, though still meaningful, lesser-certified agencies, categorized with the Big Three as “nationally recognized statistical rating organizations” (NRSROs). These firms handle 10% to 25% of bond transactions for financial and insurance organizations and corporate bond issuers. Individual practitioners skilled at creditworthiness evaluation also work for securities firms.

The History of CRAs

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About the Author

Lawrence J. White, a writer and researcher in applied microeconomics, financial regulation and international banking, is a professor at the Stern School of Business.

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