Monday, October 31, 2011

Credit Rating Companies Favoring Borrowers Paying Most - Businessweek

Credit Rating Companies Favoring Borrowers Paying Most - Businessweek:

Not surprising, but not good.

"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,”

and later:

"The report, titled “Credit Ratings Across Asset Classes: A=A?,” was co-written by Jess Cornaggia, assistant finance professor at Indiana University’s Kelley School of Business, with his wife, Kimberly J. Cornaggia, an associate professor at American University’s Kogod School of Business and John E. Hund, an assistant finance professor at Rice University’s Jones Graduate School of Business.

“We disagree with the study’s methods and findings,” said Michael Adler, a spokesman for Moody’s."

1 comment:

Sean & Farheen said...

To be fair - companies with the most rated debt tend to simply have more debt, in turn being larger companies that can support a larger debt capacity. Disney, Comcast and GE have tons of rated debt and generate tons of fees and are highly rated. Is there a correlation? No.

Five years in that industry and I never once knew how much our clients paid. Its something that outsiders dont seem to understand - we have no clue how much we're paid. Also the committee voting structure gives me the same voting power as a managing director. So even if a senior employee was in the know, its influence on rating outcomes would be muted.