More on the ratings agencies - still invincible?
Jinfo Blog

By Tim Buckley Owen

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Hard on the heels of Standard & Poors’ downgrading of the United States credit rating comes news of a Department of Justice investigation into the agency’s earlier misrating of mortgage-backed securities. Sniped at by the authorities and by nimbler, more transparent competitors, is the quasi-regulatory status of the Big Three agencies coming to an end?

According to the New York Times, which broke the story, the Department of Justice investigation had already begun before the US downgrading was announced. Apparently it’s been looking into instances where S&P analysts wanted to award lower ratings but may have been overruled by other business managers.

It’s not clear whether the other two big agencies, Moody’s and Fitch, are also being investigated, the NYT says. But whether they are or not, Reuters legal blogger Alison Frankel believes that the DOJ is more likely to prevail against S&P than all the lawyers who have failed to bring successful actions on behalf of mortgage-backed security investors.

So why do the Big Three seem so invincible and why should information managers care? Because the affair raises fundamental issues of suppliers’ liability for the information they provide, and because competitors are circling.

First of all, the big sovereign players have quasi-regulatory status which the Economist believes it would be difficult to wrest from them even if their Nationally Recognised Statistical Ratings Organisation designation were removed, because officials would continue to play safe. This may go some way to explaining the big disparity between their results and those of the more workaday agencies operating in a more competitive environment.

Commercial ratings agencies Equifax (follow link to 27 July) and Dun & Bradstreet each recently reported a 6% increase in second quarter revenue compared with the previous year.  Moody’s, by contrast, managed a 27% increase – while Reuters reports that investors are urging publisher McGraw-Hill, owner of Standard & Poors, to shed the textbook division which one might imagine would constitute its core business, because it’s the ratings that bring in the money.

So what about some competition? Recent competitors include Bloomberg (which didn’t apply for NRSRO status) and Kroll (which did) – see LiveWire coverage.  But testifying before a United States congressional committee (mentioned recently on LiveWire), Kroll said that the cost of compliance was a disincentive to new entrants, and newcomer Rapid Ratings confirmed this view, saying that until there were benefits that outweighed the costs, it would build its business outside the NRSRO framework (see Reuters coverage).

But however invincible the Big Three may seem at the moment, their dominance can’t survive for ever. When it’s gone, there could be quite a few competitors for information managers to assess – possibly without the benefit of an NRSRO safety net.

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