WHO ARE THE smartest operators in global capital markets? Hedge funds? Private equity firms? Investment bankers?
Guess again. There’s only one sector in financial services able to offer a return on equity in excess of 50% while putting zero capital at risk: the rating agency industry. But all is not well in the rating industry: the decline of the US sub-prime sector has thrown into sharp relief the inherent conflict of interest at its heart.
Rating agencies such as Moody’s Investors Service, Standard & Poor’s and Fitch Ratings should be perceived as independent third parties; increasingly they are not. The conflict of interest is obvious: those that they theoretically serve – investors – do not pay directly for the service received. These conflicts of interest cast a shadow over credit ratings, and there are fears that fixed-income capital markets are less efficient because of them. And the problem...
