Floyd Norris of The New York Times seems almost nonplussed that he found himself writing a column congratulatory to the rating agencies who empty ratings helped fuel the housing crisis we're still living in. That said, he crunched the numbers and found that when rating sovereign debt - they usually get it right.
Over all, the rating agencies have done a decent job on sovereign debt. “All sovereigns that defaulted since 1975 had noninvestment-grade ratings one year ahead of their default,” the I.M.F. reported last year.
And with politicians on both sides of the Atlantic steaming that Moody's and S&P have a seat at the table in resolving the financial crisis - Norris makes an excellent point that they are that powerful because the governments made them that way.
The power of the rating agencies grew in recent decades because government regulators often found it easier to incorporate the ratings in other rules. Worried about the credit quality of securities owned by money market funds? Require those securities to have high ratings. Trying to decide how much capital banks need to offset the risk of differing loans? Tie credit rules to ratings.
He doesn't go as far as to say that the government shouldn't have anything more to do with legitimizing rating agencies than it does his own employer - but it's an excellent and not often surfaced point.
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