Rating. An Unbearable Conflict of Interests

A storm on the market and on the world economy. The responsibilities of credit rating agencies 

Rating. An Unbearable Conflict of Interests

By Alberto Ferrucci
Published on cittanuova.it on 10/05/2010 

Two years after the explosion of the crisis originating from having cancelled all the laws that governed the financial market, we have talked a lot about changing the rules, but nothing has been done. One of the "side effects" of this lack of decision, due to the powerful strength of who opposes it, are three poor employees who suffocated by fire smoke in an Athens bank, among whom a pregnant woman. 

During the original outbreak of the crisis, one of the aspects that immediately seemed the most scandalous was the fact that credit rating agencies maintained the evaluation of maximum trustworthiness to Parmalat, Enron and Lehman Brothers until a few days prior to their failure. Not only were they paid by whom whose titles they were offering to the market, but also their major shareholders were large investment funds that operate on the very same market. 

We´re dealing with three businesses with headquarters in New York and offices everywhere: Moodys and Standard & Poors, whose shareholders are American investment funds, plus Fitch, who instead has French shareholders. Considering the high number of financial products on the market, these rating agencies are useful - but only if, being above and beyond taking sides, they can avoid improper speculative implications. In order to do their work well, businesses that certify companies´ bonds must know about classified news, which if leaked early, could obtain huge improper earnings. 

While trustful of the correctness of these rating agencies, it is absurd that such businesses be in the hands of who could more greatly obtain profit from the news that they deal with. We consider all this seen that, in the financial market, according to the "informative assymetry" so well analyzed by recent Nobel laureates in economy, the advantage is precisely in knowing information before one´s competition. 

Conflict of interests has become unbearable when these credit rating agencies have taken to passing their judgement on unreliability about treasury bonds issued by sovereign states, which in the recent crisis have gone into debt just to heal the disasters provoked by their bogus stocks. 

These are unreliabile patents that end up also being related to political content, linked to the intolerance of the financial market to the rise of the Euro - antagonist currency to the dollar, that offers investors an alternative capable of nullifying the privileges that the American currency has had since the Second World War.

Now Europe would like to create its own credit rating service for European stocks. Different rating systems than current ones are definitely needed, but - in order to not fall into the same trap of conflict of interests again - these should not be qualified as belonging to a certain part of the planet. In my opinion, as already proposed in the past and taken up again in a motion by the Italian senate, credit ratings ought to be carried out by institutions under the control of the International Monetary Fund.  

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