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Bloomberg) Credit-rating companies routinely award higher rankings to debt issued by banks and corporations that pay them the most, a conflict of interest that may escape Congressional efforts to change the way they do business.
Bonds from countries and cities that pay about half as much as issuers of less creditworthy debt are “rated more harshly,” according to a study by scholars at Indiana University in Bloomington, Washington, D.C.-based American University and Rice University in Houston. Sovereigns rated A had no defaults over a 30-year period, compared with 1.8 percent of corporate bonds and 27.2 percent of securities backed by debt such as mortgages and loans assigned that ranking, the study of Moody’s Investors Service data said.
The research shows that profit may influence credit rankings after a government panel described the rating companies as “key enablers of the financial meltdown” in 2008. New York- based Moody’s, Standard & Poor’s and Fitch Ratings still dominate scoring for the $43 trillion global debt market, pressing borrowers from Spain to California to address fiscal imbalances to avert downgrades that may raise taxpayers’ financing costs.
“There’s a problem here of conflicts, credibility and competence,” said Phil Angelides, a former California State Treasurer and chairman of the Financial Crisis Inquiry Commission, which Congress asked to examine causes of the crisis. “The current model is tragically broken, it needs to be abandoned,” he said Oct. 14 in a telephone interview. ..........(more)
The complete piece is at:
http://www.bloomberg.com/news/2011-10-28/credit-rating-companies-favor-firms-paying-most.html
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