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Buffett Defends How Rating Agencies Are Paid - The New York Times

AAA, Ba3, Ca, CCC The ratings are given to large-scale borrowers, whether companies or governments, and are an indication to buyers of this debt how likely they are to be paid back.

The score card can also affect the amount that companies or governments are charged to borrow money. If a country is deemed to have suffered a downturn in fortunes and its rating is lowered, investors may demand higher returns to lend to it, as it is judged a riskier bet. Borrowers in the news with downgraded scorecards now include the UK, most eurozone governments, and the US.

Just two of the G7 countries, Canada and Germany, retain a top AAA rating.

They are credit-rating agencies, which exist to assess the creditworthiness of bond issuers - companies or, as in this case, countries who borrow money by issuing IOUs known as bonds. But who are they? Do we need them and how do they work out whether to give the top-of-the-class AAA or a lower grade, such as CCC, which - sticking with the schools analogy - means the issuer is suspected of planning the financial equivalent of bunking off?

It was begun in by Henry Poor, who wrote a history of the finances of railroads and canals in the United States as a guide for investors. The "Standard" part came into being inwhen the Standard Statistics Bureau was set up to examine finances of non-railroad companies. Moody's was started in by John Moody, who published an analysis of the tangled and uncertain world of railway finances, grading the value of its stocks and bonds.

Fitch, with another eponymous founder, John Fitch, was set up in and is a smaller version of the other two. There are hosts of other ratings agencies, whose names rarely appear even within the darker corners of the financial pages - so why are these three businesses the ones everyone watches? Part of the answer lies with the Securities and Exchange Commission SECthe US financial watchdog.

Init acknowledged these three as Nationally Recognized Statistical Rating Organizations NRSRO. An endorsement from an NRSRO makes life quicker and easier for countries and financial institutions wishing to issue bonds. It basically tells investors a firm has a track record and indicates how likely it is to be able to pay back the money.

Further impetus for NRSROs comes from the fact that saudi arabia currency rate today regulated investment funds are required by the SEC to hold only those bonds that have a very high rating from accredited how do rating agencies make money. An insurance company's strength is also judged by the ratings applied to the investment reserves it holds. A downgrade of an issuers' rating typically pushes down the value of a bond and raises its interest rate.

It can mean regulated funds must now sell these bonds.

If lots of platforma forex plus500 opinie o are forced to sell, the price of the bond reduces further. That means a higher interest rate must be paid, which puts an even bigger strain on the borrower. The SEC actually has 10 NRSROs on its approved list, including a Canadian agency and two Japanese ones.

This is partly because they make their ratings available freely to investors - making their money from charging the organisations who want their bonds rated - something some believe can create a conflict of interest.

As a statement from the Forex near mg road Commission put it: Investment banks issuing complex products - like those that included sub-prime debt - often structure the products to make them appear as safe as possible in an attempt to attract a top rating.

They base their assessment on a range of financial and business attributes that might influence the repayment, some of which may depend on the issuer of the bond i.

The US SEC is tightening up on the way they behave. One move would stop individuals on their sales and marketing side from taking part in the actual rating. The potential for a downgrade to destabilise a country was so feared that the European Parliament this year agreed a set of rules designed to rein them in.

They state that agencies can issue ratings on countries no more than three times a year, and only after markets have closed. Europe also wants to dilute the power of the Big Three rating agencies by encouraging financial firms and others to do their own credit assessments. The Internal Market Commissioner, Michel Barnier, said: They are not just simple opinions.

And rating agencies have made serious mistakes in the past. After all, stock market index xml of mortgage-backed securities - the investments that were backed by mortgages that were either never going to be paid back or were even fraudulent - were given the very best grade by the three supposed experts in rating the likelihood of the money being paid back.

These financial products turned out to be virtually worthless. And the sudden realisation that they were rubbish, rather than gold-plated investments, triggered the worst financial crisis in decades. After the mighty US received its downgrade inrather than its cost of borrowing going up, it actually went down, as lenders decided that the US government was still one of the safest bets in the world.

And although the UK government long spoke of the importance of maintaining its triple-A status, when it was downgraded for the first time in more than 30 years, economists suggested that it would have limited impact. Moody's was just catching up with what the financial world already knew - that the UK economy, in line with many others, will take longer to recover from the aftermath of the financial crisis than expected.

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History of Credit Rating Agencies and How They Work

BBC News News navigation Sections. Business selected Market Data Markets Global Trade Companies Entrepreneurship Technology of Business Business of Sport Global Education Economy. What is a rating agency? By Rebecca Marston Business reporter, BBC News.

These are external links and will open in a new window Share this with Facebook Share this with Twitter Share this with Messenger Share this with Messenger Share this with Email Share Share this with These are external links and will open in a new window Email Share this with Email Facebook Share this with Facebook Messenger Share this with Messenger Messenger Share this with Messenger Twitter Share this with Twitter Pinterest Share this with Pinterest WhatsApp Share this with WhatsApp LinkedIn Share this with LinkedIn Copy this link http: Image copyright Getty Images Image caption A high score from a credit rating agency means cheaper borrowing - a low mark generally prompts a heavier price AAA, Ba3, Ca, CCC They are, indeed, a marking system, and one that is designed to inform interested parties.

CREDIT-RATING AGENCIES Private-sector firms that assign credit ratings for issuers of debt A credit rating takes into account the debt issuer's ability to pay back its loan That in turn affects the interest rate applied to the security eg a bond being issued A credit downgrade can make it more expensive for a government to borrow money. SCORE CARD Rating agencies use different systems involving a long list of letters A top mark is AAA or Aaa Down to BBB or Baa3 is also safe BB or Ba1 down to C is speculative - or "junk".

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