Why Did We Put Ratings Agencies' Ratings Into The Law?

from the good-questions... dept

Problems and potential conflicts coming from the bond ratings agencies were well-known well before our financial crisis hit, but still many are pointing the blame finger at those ratings agencies. And, it's certainly tempting to do so. Just as with the famed financial analysts during the late 90s tech boom, the credit agencies appear to have rated certain debt offerings very highly, despite recognizing how intrinsically risky the investments were. Given what happened following the dot com bubble collapse, it's quite likely that the bond rating agencies Moody's and S&P will get slapped down for their "mistakes."

But that would be a mistake. Both Moody's and S&P were merely expressing an opinion on the credit-worthiness and risk of the various debt offerings. An opinion should never be considered illegal by itself. The problem was that people started relying on these opinions as if they were factual realities. And who's to blame for that?

Well, in part, it's the government -- which wrote the rating agencies' ratings into law, requiring certain regulated institutions to maintain a certain percentage of "highly rated" bonds in order to engage in certain activities. That made it so the real focus was on the opinions of Moody's and the S&P, rather than on what investors believed the actual risk was on those bonds. As the link here notes, why not let the market decide what the actual risk is on these bonds, rather than trusting the (somewhat questionable) opinions of individuals who are biased and conflicted?
Hide this

Thank you for reading this Techdirt post. With so many things competing for everyone’s attention these days, we really appreciate you giving us your time. We work hard every day to put quality content out there for our community.

Techdirt is one of the few remaining truly independent media outlets. We do not have a giant corporation behind us, and we rely heavily on our community to support us, in an age when advertisers are increasingly uninterested in sponsoring small, independent sites — especially a site like ours that is unwilling to pull punches in its reporting and analysis.

While other websites have resorted to paywalls, registration requirements, and increasingly annoying/intrusive advertising, we have always kept Techdirt open and available to anyone. But in order to continue doing so, we need your support. We offer a variety of ways for our readers to support us, from direct donations to special subscriptions and cool merchandise — and every little bit helps. Thank you.

–The Techdirt Team

Filed Under: ratings agencies, regulations
Companies: moody's, s&p

Reader Comments

Subscribe: RSS

View by: Time | Thread

  1. identicon
    Eldakka, 6 Jan 2009 @ 4:41pm

    Re: Re: Opinion vs Advice?

    I can't speak for the US, but here in Australia there is a definite legal difference between offering an opinion and offering advice.

    A licensed financial adviser provides advice, which if shown to be negligently provided could be cause for legal action.

    However if you had a conversation with your mate at the pub, he'd be providing an opinion, which would have no legal basis.

    You pay a medical doctor for medical advice, you ask a mate for their medical opinion. You can sue the provider of advice when that advice is offered in a professional capacity, but not of opinion.

    Common English usage often blurs the precise meaning of words. Advice and opinion might be used interchangeably while having a general discussion, but they do have subtly different meanings, especially once we start entering the legal realm.

Add Your Comment

Have a Techdirt Account? Sign in now. Want one? Register here

Subscribe to the Techdirt Daily newsletter

Comment Options:

  • Use markdown. Use plain text.
  • Remember name/email/url (set a cookie)

Follow Techdirt
Special Affiliate Offer

Essential Reading
Techdirt Insider Chat
Recent Stories

This site, like most other sites on the web, uses cookies. For more information, see our privacy policy. Got it

Email This

This feature is only available to registered users. Register or sign in to use it.