Ten credit ratings agencies are in charge of predicting risk for investors worldwide. So why didn’t they predict the economic crisis?

• Agencies like Moody’s and Standard & Poor’s rate the quality of companies, bonds, even countries. Investors use this information to decide whether a particular investment is a safe bet.
• In the financial reform bill that passed this July, the government called them out for ineffective ratings and serious conflicts of interest.
• In many lawsuits against the agencies, they’ve said that the First Amendment protects their right to assess investment risks whether they end up being right or wrong. But because they’re regulated by the government, they’re supposed to be trusted and non-biased sources of information for the public.
• The conflict of interest appears when a credit rating agency wants to do business with a particular company. In that case, it may be tempted to give that company a higher rating than it really deserves.

Facts & Figures

• The ratings industry is worth about $6 billion worldwide
• $3 billion of that is in the U.S. market
• Fitch, Moody’s, and S&P control 97% of all U.S. ratings
• Moody’s rated 42,625 mortgage-backed securities (you know, the ones that blew up the real estate market) as AAA – the same rating as ultra-secure U.S. Treasury bonds

Best Quote

“Activities of credit rating agencies are fundamentally commercial in character and should be subject to the same standards of liability and oversight as apply to auditors, securities analysts and investment bankers.” – from the Dodd-Frank financial reform bill