Debt crisis loosens top agencies' grip over credit ratings (2)

10:50, June 02, 2010      

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The board of directors and the board of supervisors should include independent directors and independent supervisors. Credit ratings in the United States originated from spontaneous market behaviors but expanded by government support and institutional arrangement. It was the U.S. Stock Supervisory Committee's decision that the issue of bonds should be rated by the top three rating agencies first.

Nowadays, bonds must take a credit rating before they are issued. The credit rating agencies have the final say on any credit risks, therefore, when the rating results provided by the credit rating agencies are completely wrong, the operation of these agencies is completely unaffected. This is not in accordance with the fundamentals of a market economy, and as a result, enhanced supervision should be considered. It was a good start for the U.S. government to discuss the establishment of a Rating Supervisory Committee.

The rating fees and the liabilities of the top three U.S. agencies were also generally questioned. Debt issuers, not the investors, usually paid for the rating fees. The major flow was: after the assessee applied for a credit rating and paid for it, the rating agencies would begin to evaluate and ask the assessee to confirm their rating report. If the assessee challenged the result, the agencies would reevaluate until there were no more disputes. At last, the rating agencies would announce the final rating results.

The investors actually know nothing about the rating process and have no right of speech or supervision in this matter. People have every reason to doubt that the rating agencies are not objective enough due to the inherent conflict of interest. The rating agencies should not be regarded as legal persons because they did not take any legal liabilities. However, the rating agencies should not be regarded as social service agencies because they did not take any social responsibilities either. Their rating report is like a product without any guarantees.

The future rating industry should change the means of charging for their services. Take facility rating for example, the fees could be divided into three categories: the first category is the cost of rating, which should be paid by the assessee or the applicant; the second category is the announcement fee of the rating results, which should be paid by the media and the third category is the report fee of the rating, which should be paid by the investors who need the report.
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