Most Agree That The Ratings Of Cdos Were Very Questionable And Poor

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Most of those involved in the financial market agree that the ratings of CDOs were very questionable and poor. Why was it so and can alternatives prevent a repeat of such behaviour in the future?

It is all related to the type of competition within the NRSRO. Theoretically speaking it is healthy for the rating agencies to compete amongst themselves. It should be encouraging for innovations and high standard of research. But when this is practically applied problems crop up.

It has become the norm for the issuer of the bonds to pay the rating agencies to award the ratings so as to attract investors. In such circumstances it is but natural for ratings to be inflated because it is the issuing firm that chooses its rating agency.

In the case of the other model where the investor pays for the ratings the scenario is more aligned but there are doubts how the free market will solve the issue.
Apart from business models the financial regulations perhaps are at the root of the trouble. The NRSRO is the founding source of authority it being the main source of gathering information regarding the value of the bonds. This hampers competition and push towards innovation.

Public policy functions most importantly rely on what one thinks to be the basic problem relating to the agencies that rate credit. It also depends on the confidence that one has on the power of these agencies to find out remedies for problems.

Of the many suggestions coming forth, one is that in the model where the issuer is paying the SEC could set up a department hosting a central clearing platform for these agencies that do the rating.

This central clearing platform will make the choice about which one will evaluate the debt. The choice may be random or systematic to boost competition. The choice would depend on the experience of that particular agency in rating the particular category of debt.

The rating agency would then go head after being given a fee and do the rating of the debt. This type allows for the issuer to pay but the choice is made not by the issuer but by the central body. The choice being dependent on past performances will lead to healthy competition. The agency will then feel encouraged to go ahead with research and gather proper information.
However, even in this alternative model, too much faith is being placed on the regulator to measure the value of the bonds.

About the Author:
Julie Thompson, has been working on ForeclosureDataOnline.com studying the foreclosures market, helping buyers on the finer points of Grain Valley foreclosed homes.



Article Originally Published On: http://www.articlesnatch.com


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