Free Essay

Rating Agencies and Financial Crisis

In: Business and Management

Submitted By ghido8
Words 2909
Pages 12
Table of content: 1) Introduction

2) Rating agency: * Who are rating agencies? * Development of the rating agencies * Function of rating agencies * The procedure of rating assignment * Solicited method * Unsolicited method * Sovereign rating * Rating scale and definition * Advantages of credit rating * Disadvantages of credit rating

3) Rating agencies and companies: * Failures of rating agencies * Reasons for the mistakes of rating agencies

4) Rating agencies and states: * Background * History of Italian rating * Critics against Italian rating

5) How to improve the rating: * “Issuer pays” or “Investor pays” * Public funding of rating * Government rating agency * Increase of competition * Liability of CRAs

6) Conclusion

7) references

Introduction:
The history of the Credit Rating Agencies (CRAs) is well represented through a parabolic trend. Before 1960 CRAs were quite famous only in the USA, later on their importance have increased in all the world until the recent crisis, in which they reached their highest level; whereupon they have been loosing power.
Credit Rating Agencies are: an independent company that evaluates the financial condition of issuers of debt instruments and then assigns a rating that reflects its assessment of the issuer's ability to make the debt payments. An important key to understand the future of the thesis concerns the reliability of these agencies; actually they provide only an indicative creditworthiness of a company, they are not absolute predictor of the risk of default on a particular obligation.
In the essay we will focus our attention on the position, the importance and the critics concerned the CRAs during the financial crisis started in 2008.
First of all we will provide an overview concern the rating agencies in general, who they are, what is their history, what are their function and development; therefore we will talk about the rating scale, the procedure of rating assignment, advantages and disadvantages.
Secondly we will focus on the link between rating agencies and private companies, and we’ll analyze the main important failures concerning the quality of rating happened between 2008 and 2009 and we’ll expose the reasons of the clamorous errors.
Thirdly we will pay attention on the dynamics concerning CRAs and states; what happened in Europe during the financial crisis, in particular about Italian situation: how Italian rating has been falling down and the main critics raised against rating agency’s work.
Subsequently the last part of the thesis will be focused on the methods to improve the performance of CRAs, the aim of governments, issuers and investors is shared; each category want to improve the quality of the rating and eliminate the conflict of interest. Therefore there are several theories in this regard, but as we will see, none of them is efficient.
After having examined all this topic points, the conclusion will be given.

Conclusion:
In conclusion, the major role that credit agencies have played during the financial crisis have brought a new and considerable interest on the activity of the CRAs.
Unfortunately this kind of interest hadn’t shown before the downturn; actually if it had manifested before, rating agencies would have felt a bigger responsibility concerning the reliability of their rating, and maybe they wouldn’t have published daring attempts.
Therefore, another solution that rating agencies could have undertaken was the interruption of those rating, surrounded by lack of certainties, in order to reduce catastrophic consequences and also regarding CRAs, they would have kept higher credibility.
Summing up it is clear that is better distrust by the rating expressed by the “three sisters”, because we have seen that agencies apparently loyal and honest, could hide speculation and conflict of interest; plagues for international economy.
If on the one hand the entire economic world have blamed the CRAs as the cause of the crisis, on the other hand is also recognizable that in the current state world needs rating agencies. Therefore we need to find a solution to regulate the system and to improve it, in order to gain a transparent, reliable rating, without conflict of interest.
Although all the world has the same idea, as we have seen the definitive solution is far to be found, because every attempt and every theory has a weak point and the main problems are still remaining.
Therefore, since credit rating agencies are fundamental in our economy, we can’t give up, we need a strong regulatory intervention in order to solve the problems and ensure that such crises do not happen again in the future.
Piè di pagina: 1) partnoy (pag 3): THE SISKEL AND EBERT OF FINANCIAL MARKETS?:TWO THUMBS DOWN FOR THE CREDIT RATING AGENCIES. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=167412 2) Lewis Tappan (pag 3): http://www.pbs.org/wgbh/theymadeamerica/whomade/tappan_hi.html 3) S&P: http://www.standardandpoors.com/about-sp/timeline/en/us/ 4) Moody’s: https://www.moodys.com/Pages/atc001.aspx 5) Manual of Industrial and Miscellaneous Securities: https://www.moodys.com/Pages/atc001.aspx 6) Fitch: https://www.fitchratings.com/web/en/dynamic/about-us/about-us.jsp
S&P, Moody’s and Fitch: http://www.moneycrashers.com/credit-rating-agencies-history/ 7) Lawrence J. White: http://www.stern.nyu.edu/faculty/bio/lawrence-white 8) Credit rating scale: http://multiple-markets.com/5_agencies.htm 9) All the companies failed: http://www.linkiesta.it/agenzie-rating http://www.sbilanciamoci.info/Archivio/finanza/Standard-co.-le-grande-declassate-1402 10) Prof. Dimitar Rafailov: http://alternativi.unwe.bg/alternativi/br51/04.pdf (rating crisis) 11) Martin Feldstein: http://money.cnn.com/2011/08/07/markets/world_markets_downgrade/ 12) Graph of rating countries: * ChartsBin: How Moody's, S&P and Fitch Rate Each Country's Credit Rating http://chartsbin.com/view/1178 * ChartsBin: Moody's Credit Rating for each country. http://chartsbin.com/view/1175 * ChartsBin: Standard & Poor's Credit Rating for each country. http://chartsbin.com/view/1177 13) Mario Monti: Italian first minister 2012-2013: http://biografieonline.it/biografia.htm?BioID=95&biografia=Mario+Monti 14) Letta: Italian first minister 2013-2014: http://biografieonline.it/biografia.htm?BioID=2753&biografia=Enrico+Letta 15) Prodi: italian first minister 1996-1998; 2006-2008. http://biografieonline.it/biografia.htm?BioID=982&biografia=Romano+Prodi 16) Ferruccio de bertoli: http://www.istalcidedegasperi.it/website/index.php?option=com_docman&task=doc_view&gid=1315&Itemid= 17) Robert E. Litan, Sylvain Rock Raynes and Susan M. Philips: http://www.international-economy.com/TIE_F08_CreditRatingSymp.pdf 18) Corte dei Conti: http://www.corteconti.it/controllo/controllo_economico_finanziario/ 19) Codacons: http://www.unsitoacaso.com/associazioni-di-consumatori-il-codacons/

References:
Lawrence J. White: Credit Rating Agencies: An Overview Stern School of Business New York University Prepared for the Annual Review of Financial Economics Revised draft: 6/19/13. http://webdocs.stern.nyu.edu/old_web/economics/docs/workingpapers/2013/White_CRAsARFE_Jun2013.pdf
Lawrence J. White: Markets: The Credit Rating Agencies. Journal of Economic Perspectives—Volume 24, Number 2—Spring 2010—Pages 211–226. http://mng.ibu.edu.ba/assets/userfiles/mng/coursematerials/reading%20Credit%20Rating%20Agencies.pdf

Authors: Christopher Alessi, Roya Wolverson, and Mohammed Aly Sergie, Online Writer/Editor: the credit rating controversy; the council of Updated: October 22, 2013 http://www.cfr.org/financial-crises/credit-rating-controversy/p22328 Kalen Smith: History of Credit Rating Agencies and How They Work. Money crashers. http://www.moneycrashers.com/credit-rating-agencies-history/ Euronews:Italy goes after ratings agencies over downgrades 05/02 http://www.euronews.com/2014/02/05/italy-goes-after-ratings-agencies-over-downgrades/ Moody’s agency: https://www.moodys.com/Pages/amr002001.aspx
Prof. Dimitar Rafailov: The Failures of Credit Rating Agencies during the Global Financial Crisis – Causes and Possible Solutions (2011) http://alternativi.unwe.bg/alternativi/br51/04.pdf
News business: Italy's credit rating has been downgraded by S&P. 9 July 2013: http://www.bbc.com/news/business-23250689

Standard and Poor’s: Italy's Unsolicited Ratings Lowered To 'BBB+/A-2'; Outlook Negative. 13 January 2012. http://www.standardandpoors.com/ratings/articles/en/us/?articleType=HTML&assetID=1245327296243

Luciana Lopez and Paolo Biondi: S&P cuts Italy rating, leaves outlook negative. 9 July 2013. http://www.reuters.com/article/2013/07/09/us-italy-ratings-sandp-idUSBRE9680WM20130709

The telegraph: S&P downgrades Italy: the full text. 25 March 2014. http://www.telegraph.co.uk/finance/financialcrisis/8775616/SandP-downgrades-Italy-the-full-text.html European Commission: Press release: Stricter rules for credit rating agencies to enter into force. 18 June 2013. http://europa.eu/rapid/press-release_IP-13-555_en.htm
Terri Eyden on Jan 17 2013: Credit Rating Agency Performance Needs Improvement http://www.accountingweb.com/article/credit-rating-agency-performance-needs-improvement/220749

SEC Proposes Rules to Increase Transparency and Improve Integrity of Credit Ratings: FOR IMMEDIATE RELEASE. 2011-113. http://www.sec.gov/news/press/2011/2011-113.htm

Stefanie Knoll; November 13, 2013: Credit rating agencies: The current system and how it can be improved. http://journalistsresource.org/studies/economics/banks/credit-rating-agencies-overview#

Working knowledge: Why Competition May Not Improve Credit Rating Agencies. 31 August 2009. http://hbswk.hbs.edu/item/6260.html

Frank Partnoy: The Siskel and Ebert of Financial Markets: Two Thumbs Down for the Credit Rating Agencies (1999). http://papers.ssrn.com/sol3/papers.cfm?abstract_id=167412

Who made America: Lewis Tappan: http://www.pbs.org/wgbh/theymadeamerica/whomade/tappan_hi.html

Moody’s corporation: Moody's History: A Century of Market Leadership https://www.moodys.com/Pages/atc001.aspx

ChartsBin: How Moody's, S&P and Fitch Rate Each Country's Credit Rating http://chartsbin.com/view/1178

ChartsBin: Moody's Credit Rating for each country. http://chartsbin.com/view/1175

ChartsBin: Standard & Poor's Credit Rating for each country. http://chartsbin.com/view/1177

SCALA DEI RATING DI FITCH: http://www.omnia-formazione.it/Documenti/Free/Reddito%20Fisso/Mercati/RatingFitch.pdf LA SCALA DEI RATING DI MOODY’S http://www.borsaitaliana.it/old/pdf/it/subsite/intermediariedinvestitori/investitoriistituzionali/ratings/scalamoody.pdf LA SCALA DEI RATING DI STANDARD & POOR’S http://www.omnia-formazione.it/Documenti/Free/Reddito%20Fisso/Mercati/RatingS&P.pdf Carlo Manzo e Dario Ronzoni: Da Parmalat a Lehman, quando l’agenzia di rating sbaglia tutto (2011) http://www.linkiesta.it/agenzie-rating

Sbilanciamoci.info: Standard & co., le grande declassate 03/02/2009 http://www.sbilanciamoci.info/Archivio/finanza/Standard-co.-le-grande-declassate-1402

Il sole 24 ore: Vito lops 24 September 2011: La storia dei rating sull'Italia. Come si è mosso nel tempo il giudizio sul debito del Paese. http://www.ilsole24ore.com/art/finanza-e-mercati/2011-09-20/storia-rating-italia-come-083532.shtml?uuid=AaaCwv5D

Antonio Palma20 settembre 2011: fanpage.it-economia: La storia del rating italiano, un declassamento iniziato nel 2003: http://www.fanpage.it/la-storia-del-rating-italiano-un-declassamento-iniziato-nel-2003/
Wallstreetrack : Italia Debito Pubblico e Rating: La Spesa della Pubblica Amministrazione http://wallstreetrack.wordpress.com/2006/10/20/italia-debito-pubblico-rating-problema-dei-dipendenti-pubblici-e-degli-enti-inutili-ovvero-della-spesa-della-pa/ Il sole 14 ore: 25 October 2008: S&P sulla caduta di Prodi: «Non incide su rating Italia» http://www.ilsole24ore.com/art/SoleOnLine4/Finanza%20e%20Mercati/2008/01/Standard-Poor-rating.shtml?uuid=1808e960-cb55-11dc-a2df-00000e251029&DocRulesView=Libero Il sole 24 ore: 13 January 2009: S&P conferma rating Italia, ma prevede debito/Pil al 109% http://www.ilsole24ore.com/art/SoleOnLine4/Economia%20e%20Lavoro/2009/01/standard-poor-rating.shtml?uuid=2887831c-e186-11dd-8573-891a1fb2d03c Il sole 24 ore: 2 November 2010: Standard & Poor's conferma i rating dell'Italia http://www.ilsole24ore.com/art/finanza-e-mercati/2010-11-02/standard-poors-conferma-rating-134612.shtml?uuid=AYWEKVgC

Il sole 24 ore: 20 September 2011: Governo fragile: S&P taglia il rating dell'Italia http://www.ilsole24ore.com/art/finanza-e-mercati/2011-09-20/governo-fragile-taglia-rating-080048.shtml?uuid=AaifDv5D

Il sola 24 ore:14 January 2012 Italia giù di due gradini a BBB+ http://webcache.googleusercontent.com/search?q=cache:C2CZcpMbkqgJ:www.ilsole24ore.com/art/finanza-e-mercati/2012-01-13/italia-gradini-225717.shtml%3Fuuid%3DAaCCRsdE+&cd=1&hl=it&ct=clnk&gl=it Il sole 24 ore: 9 July 2013 S&P taglia il rating italiano a tripla B, a due passi dal livello «spazzatura». Il Tesoro: scelta superata dai fatti http://www.ilsole24ore.com/art/notizie/2013-07-09/taglia-rating-italiano-tripla-193932.shtml?uuid=AbzdgkCI

Il corriere della sera: 13 July 2012: Taglio del rating, dall'Ue: «Timing improprio» Monti: «Disgrazia ma il mercato ci ha premiati» . http://www.corriere.it/economia/12_luglio_13/moodys-declassamento-italia-reazioni_d0f4302e-ccc7-11e1-a3bf-e53ef061f69e.shtml

Economy 2050: 2 August 2013 il taglio del rating italiano: stavolta il motivo è reale. http://www.economy2050.it/taglio-rating-italiano-motivo-reale/

Michela Boccher: agenzie di rating e declassamenti (2012) http://www.istalcidedegasperi.it/website/index.php?option=com_docman&task=doc_view&gid=1315&Itemid=

Yahoo Italia-finanza: Agenzie rating, inchiesta della Corte dei Conti su declassamento Italia (5 February 2014) http://it.finance.yahoo.com/notizie/agenzie-rating-inchiesta-della-corte-173105082.html

Il corriere della sera-economia: 5 February 2014: E la Corte dei conti chiede 234 miliardi a S&P http://www.corriere.it/economia/14_febbraio_05/corte-conti-chiede-234-miliardi-sp-9d985e9c-8e29-11e3-afb4-50ae7364e5b3.shtml

Il sole 24 ore: 5 February 2014: Italia contro Standard & Poor's: le agenzie di rating non hanno valutato il patrimonio artistico. Corte dei Conti: «È in corso un'istruttoria» http://www.ilsole24ore.com/art/notizie/2014-02-05/l-italia-accusa-standard-poor-s-agenzia-rating-non-ha-valutato-patrimonio-artistico-danni-234-miliardi--072510.shtml?uuid=AB6buYu
The International economy (2008): Do the Credit Rating Agencies Deserve to Exist? http://www.international-economy.com/TIE_F08_CreditRatingSymp.pdf

John Ryan: 1 January 2012: the negative impact of credit rating agency and proposal for better regulation. http://www.swp-berlin.org/fileadmin/contents/products/arbeitspapiere/The_Negative_Impact_of_Credit_Rating_Agencies_KS.pdf
Standard and Poor’s website: http://www.standardandpoors.com/about-sp/timeline/en/us/
Moody’s website: https://www.moodys.com/Pages/atc001.aspx
Fitch website: https://www.fitchratings.com/web/en/dynamic/about-us/about-us.jsp
Credit rating scale: http://multiple-markets.com/5_agencies.htm
Martin Feldstein: http://money.cnn.com/2011/08/07/markets/world_markets_downgrade/
Graph of rating countries: * ChartsBin: How Moody's, S&P and Fitch Rate Each Country's Credit Rating http://chartsbin.com/view/1178 * ChartsBin: Moody's Credit Rating for each country. http://chartsbin.com/view/1175 * ChartsBin: Standard & Poor's Credit Rating for each country. http://chartsbin.com/view/1177

Mario Monti: Italian first minister 2012-2013: http://biografieonline.it/biografia.htm?BioID=95&biografia=Mario+Monti

Letta: Italian first minister 2013-2014: http://biografieonline.it/biografia.htm?BioID=2753&biografia=Enrico+Letta

Prodi: italian first minister 1996-1998; 2006-2008. http://biografieonline.it/biografia.htm?BioID=982&biografia=Romano+Prodi

Ferruccio de bertoli: http://www.istalcidedegasperi.it/website/index.php?option=com_docman&task=doc_view&gid=1315&Itemid=

Robert E. Litan, Sylvain Rock Raynes and Susan M. Philips: http://www.international-economy.com/TIE_F08_CreditRatingSymp.pdf

Corte dei Conti: http://www.corteconti.it/controllo/controllo_economico_finanziario/

Codacons: http://www.unsitoacaso.com/associazioni-di-consumatori-il-codacons/

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Inizio modulo

Fine modulo Rating Description | | Rating by Rating Organization | INVESTMENT GRADE | Highest credit quality with minimal risk of default. Extremely strong capacity to meet financial commitments. | | | | Fitch | AAA | Moody's | Aaa | S&P | AAA | | Superior to very high credit quality and very low risk of default. Very strong capacity to meet financial commitments. | | Fitch | AA | Moody's | Aa | S&P | AA | | High to upper-medium credit quality with some risk factors that could contribute to default. Bonds in this category are still considered to be in little danger of default risk. | | | | | | Fitch | A | Moody's | A | S&P | A | | Adequate to medium credit quality, with acceptable levels of risk. Could be susceptible to default risk in the long term, or there may be other adverse conditions present which reduce credit quality. | | | | | | Fitch | BBB | Moody's | Baa | S&P | BBB | | NON-INVESTMENT GRADE | Questionable to speculative financial security, with additional factors that may contribute to default, such as ability to meet debt obligations, especially during periods of economic recession. | | | | | | Fitch | BB | Moody's | Ba | S&P | BB | | Speculative to highly speculative financial security, with low expectation that issuer will meet debt obligations. | | Fitch | B | Moody's | B | S&P | B | | Very highly speculative with high risk of default. | | | | | | Fitch | CCC | Moody's | Ca | S&P | CCC | | Very highly speculative with danger of default, or default probable, or may have recently occurred. | | | | | | Fitch | CC | Moody's | Caa | S&P | CC | | Very highly speculative, often accompanied by bankruptcy petitions; default immanent or has recently occurred. | | | | | | Fitch | C+,C,C- | Moody's | C | S&P | C+,C,C- | | Default and/or in arrears. Issuer has not met scheduled payment of interest or principal or made clear it will miss such payments. | | | | | | Fitch | D | Moody's | N/A | S&P | D | |

Moody’s | S&P | Fitch | Definition | Aaa | AAA | AAA | Highest quality; extraordinary ability to repay principal and interest | Aa | AA | AA | High quality; very strong capacity to repay | A | A | A | Upper medium grade; strong capacity to repay | Baa | BBB | BBB | Medium grade; adequate capacity to repay | Ba | BB | BB | Speculative; repayment protection moderate | B | B | B | Highly speculative; lightly protected | Caa | CCC | CCC | Of poor standing; possibility of default | Ca | CC | CC | Minimally protected; default probable | C | C | C | In actual or imminent default | D | D | D | In default |

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