Lawrence J. White on the History of the Bond Rating Agencies

12 08 2011

Lawrence J. White, a professor at NYU’s Stern School of business recently spoke about the history of the bond rating agencies on the NPR radio show Planet Money.

He notes that there was a major change in the bond rating industry in the late 1960s. Up to that point, the rating agencies were paid by investors, who had a strong interest in getting accurate information. Under this system, the rating agencies did a pretty good job of separating good from bad investments.

In the late 1960s, the rating agencies switched to charging the people who were issuing bonds, which created all sorts of conflicts of interest. According to Professor White, this change was driven by technology.

White blames the shift on the invention of “the high-speed photocopy machine.” The ratings agencies were afraid, he says, that investors would just pass around rating information for free. So they had to start making their money from the company side.

Read more here.

Shoot the Messenger

12 08 2011

Standard & Poor’s downgrade of the U.S. government’s credit rating has created a furious political reaction in Washington along with demands that the firm be punished for its “unpatriotic” actions.

“Democrats and Republicans in Congress are gearing up to put it under investigative scrutiny and do more to restrict the influence of S&P and its peers in financial markets.”  Read more here. As I have mentioned in a previous blog post, S&P’s offices in Milan have also been subject to harassment by Italian police.

The ratings issued by these agencies may be unreliable, but I am very uncomfortable with restricting their freedom of speech.