Is it time to look at the Rating Agency model ? TED talk by Annette Heuser

For years Fitch, Standard & Poor's and Moody's have been ruling the roost in the Rating Agency industry. These 3 Rating Agencies (and other smaller players) have the power to rate companies, banks, and even countries.  

Courtesy: The Economist

Investors, corporates, banks, and even countries rely on the work of the Rating Agencies and base their own decisions on the inherent risks of a potential investment on the ratings provided by these agencies. 

Due to the weight the ratings carry, one would expect the ratings agencies to be very objective, accurate and truthful under all circumstances - right ?  Apparently not so - The FINAL REPORT OF THE NATIONAL COMMISSION ON THE CAUSES OF THE FINANCIAL AND ECONOMIC CRISIS IN THE UNITED STATES after the 2008 financial meltdown found that the 3 key players:

• "were essential cogs in the wheels of financial destruction" (page XXVV), and 
• that the "mortage -related securities at the heart of the crisis could not have have been marketed and sold without their seal of approval". 
• The Report continues to say that "this crisis could not have happened without the rating agencies"  (emphasis author's own)

Blind faith in the objectivity and accuracy of Rating Agencies has previously lead to billions of $ losses internationally in the wake of the Subprime financial meltdown. Worldwide thousands and thousands of jobs have been lost. Various countries are faced with crippling debt and economies struggling with recession.

This begs the question - who is providing oversight and rating the performance of the Rating Agencies?   Is the answer more competition, or more oversight? A different operating model? Can a rating agency with a strong regional and or political bias really be objective or is it simply pushing a specific geo-political agenda?  

Read the Economist's article here

The EU has in the wake of the crisis passed legislation to start the change - watch this BBC news clip 

So how about a completely different approach - Watch this thought provoking talk by Annette Heuser on TED talks

http://www.ted.com/talks/annette_heuser_the_3_agencies_with_the_power_to_make_or_break_economies.html

Your thoughts ?

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Further reading:

http://www.gpo.gov/fdsys/pkg/GPO-FCIC/content-detail.html 

http://en.wikipedia.org/wiki/Big_Three_(credit_rating_agencies)

http://www.treasurers.org/node/3168

http://www.yourarticlelibrary.com/business/6-important-functions-of-the-credit-rating-serve/1441/