The End of the Ratings Agency?

We are seeing two things going on here.

First, we have a crisis in confidence in the ratings agencies, best exemplified by the decision of state insurance regulators reviewing their reliance on ratings agencies:

State regulators scheduled a hearing to review their reliance on ratings firms in grading insurers’ financial strength and whether changes are needed after the plunge of top-ranked bonds exposed flaws in credit scores.

If people no longer believe in ratings agencies, then they no longer have a business.

They business is quite literally a confidence game.

This, however is a long term problem.

The more immediate problem is that the Courts have finally got a clue, and determined that in the presence of evidence, email messages specifically, that these agencies were "putting lipstick on a pig," that the ratings agencies can be held liable for fraud, and that these opinions, which they sell not subject to 1^st amendment protections.

There are clear indications, emails and the like, that the ratings agencies were deliberately issuing inaccurate ratings in order to boost market share and consulting income.

David Einhorn explains why the recent suit against the ratings agencies is so catastrophic:



Their ratings business is entirely dependent on a lack of legal jeopardy, and they have now lost this.

Doubtless there will be some sort of ratings business, but I expect it to be very tightly regulated, or possibly done by a federal agency.

And then there is this bit of Panglossian crap:



Note the comment at about 6:10,

There has already been a shift. There's a recognition; there's potential liability, and any intelligent compliance officer at the investment bank, at the major money managers, are going to say, "We have to do something about this," and they are in the process of changing their practices.

I would not trust this guy to manage a lemonade stand.