Fraud and Greed of Trusted Rating Agencies Helped Spread the Credit Crisis

Advantages and Disadvantages of Credit cards

Credit cards eliminate the need to carry large sums of cash

Places that are suspicious of personal checks often take credit cards.

You often get the best rates of exchange when traveling in foreign countries if you use your credit card for purchases and your ATM card to get cash.

Credit cards can help coordinate receipts for tax purposes.

Consumers often have more than one credit card and each one has a credit limit. Consumers can fall into the habit of using credit cards to extend their income.

Credit cards are easier to use than applying for loans even when a loan from a credit union, bank or other financial institution may provide the funds at a lower interest rate.

Advantages and Disadvantages of Credit cards

Underlying the credit crisis gripping the U.S. and world economies is a crisis of confidence. Until depositors, bankers and investors regain confidence in the quality of ratings we rely upon to measure financial stability and creditworthiness, the tremors that underlie the credit crisis will drag on indefinitely.

By law, certain investors must rely on the ratings of a handful of Securities and Exchange Commission designated “Nationally Recognized Statistical Rating Organizations” (NRSROs). Similarly, money market funds can only invest in securities with the highest NRSRO ratings.

Standard ; Poor’s Ratings Services, Moody’s Investors Service (MCO) and Fitch Ratings Inc. are all SEC-designated NRSROs. They are the largest, best-known and most-profitable ratings firms in the tiny, $5 billion-a-year universe of ratings firms.

The problem with the business of rating the issuers of securities, and rating the securities they issue – such as mortgage-backed securities and collateralized mortgage-backed obligations – is that the rating agencies are paid by the issuers to rate them. Objectivity aside, ratings firms are in business not to rate but to make money for themselves by rating issuers and their securities. God help you if there’s a problem.

Clarkson was willing to switch analysts if clients complained, which several did, including Credit Suisse Group AG (ADR: CS), UBS AG (UBS), and Goldman Sachs Group Inc. (GS).

Under Clarkson, Moody’s expanded and grabbed a huge piece of the deal-ratings-market pie. By 2006, the company was rating $9 out of every $10 raised in mortgage securities. Former Moody’s analyst Mark Froeba told The Journal that “there was never an explicit directive to subordinate rating quality to market share.

  • The rating agencies can’t rate debt they help structure.
  • Analysts can’t participate in fee negotiations.
  • Analysts must disclose a random 10% sampling of their ratings within six months.
  • The ratings agencies must maintain a history of complaints against analysts.
  • And that the agencies must record when an analyst’s rating for structured debt differs from a quantitative model.