There are plenty Ratings Agencies out there and some of the biggest ones are Standard & Poor’s, Moody’s, as well as Dunn & Bradstreet.
Their duty is to actually assess whether anyone will be able to repay his or her debts and thus help the individuals who are trading debt contracts in the secondary market.
Standard and Poor’s is probably the best known and highly regarded of the rating’s agencies.
This means that for people who are trading debt contracts like treasury gilts after they’ve been issued, the agencies will help out with assessing the right price to be charged.
Too Much Clout?
The fact is that during the financial crisis, these agencies were criticized quite a lot for having too much clout in unfit markets.
On top of that they were also attacked in the press and by some politicians because they actually failed in warning against the risks which were posed by certain securities, especially mortgage backed securities.
Being downgraded or losing a good rating means a lot to a country, as that country can easily lose its ability to borrow in the markets.
The good news is that thanks to the 3 great agencies in the country, anyone will be able to know the rating of countries worldwide. The fact is that each agency will have a different approach and what this means is that they will be color coded to make the difference.
To put it out in layman terms, the crisis 4 years ago started because many homeowners in the USA found themselves with a mortgage that they could not afford.
Furthermore, the crisis spread because many fund managers and bankers had backed those mortgages foolishly and that is why in the process they managed to lose a lot of money.
Even thought they took this decision because they lacked foresight, the rating agencies also had a fault as they failed to inform them of the risks involved in their behavior. It seems that 4 years ago many mortgage based debts were rated at triple A, when in fact they should have been rated as junk.
Conflicts of Interest
There is also the problem that rating agencies are actually rated by the same companies they are rating. So basically, if a company wants to be rated, it has to pay agencies between fifteen hundred dollars and two and a half million dollars, depending on the size of the company.
In theory this actually creates a conflict of interest, because it gives the agency incentives to offer a certain company a favorable rating. This is something that could explain the reasons to why in the last 10 years agencies were relaxed and didn’t want to question any of the risks banks were taking on, or how precise the accuracy of their accounts was.
What About Insurance Company Ratings?
Worldwide there are more than one hundred and fifty Insurance Rating agencies, yet if they would like to have any credibility, they should have at least one good rating from Fitch, S&P and Moody’s. If they could have all of them, that would be perfect.
It seems that the financial crisis has really affected many European countries and even though Britain is one of them, many people feel that the UK didn’t take as much damage as the rest, but that remains to be seen.