This document discusses rating agencies and their influence on markets. It questions whether rating agencies can be trusted given their failures in 2008. While rating agencies provide opinions on debt risk, they are paid by the issuers they rate, creating a conflict of interest. Their ratings have a cascade effect where investors rely heavily on them due to a lack of alternative sources of information. Improving the reliability of ratings will be difficult due to these conflicts and incentives problems.

1. Dependency on rating agencies:
can we trust them?
Sylvie Focquet
March 2012

2. Rating agencies have a huge influence on the market
…

3. …but why are they so powerful?...
…but why are they so powerful?...
Moody’s headquarter

4. …and can we trust them?
2008 Rating agencies hearing

5. Companies Low Interest % Investors
and states
Could you lend me money?
Our opinion:
“It is good
quality debt”
Is it risky? Rating agencies
What do the rating agencies?

6. Companies High Interest % Investors
and states
Could you lend me money?
Our opinion:
“It is junk
debt”
Is it risky? Rating agencies
More risk more return.

7. Rating agencies give an opinion about the debt risk
AAA
C

8. Who are they?
>90% of
revenues
mostly paid by the corporate issuers

9. Why are they so powerful?
Insufficient
information
Legislation
Investor
Strategy

10. Cascade effect
Cascade effect

11. Rating agencies
Cascade effect
Investors
Attention danger
Debt
Debt

12. Can we trust them? : Performance?
Some big failures…
…however they can add value

13. Can we trust them? Conflicts of interest
Issuer
paid
Shareholders

14. Can we trust them: civil liability?
How to distinguish between
Bad luck, negligence or bad intent?
Who will take the risk to
give a different opinion?

15. Can we better trust them with investors paid agencies?
Who is willing to pay?
Some investors
…but they can also influence ratings
Free rider problem

16. Can we better trust them with more competition?
I will give more Company can rate-shop
nice ratings
I will need less info

17. How to reduce our dependence?
Legislation change
Own risk assessment

18. What are the alternatives?
Market based indicators Accounting ratios
Alternatives are Complement
not perfect ratings

19. Conclusion
Improving ratings will be
difficult and tricky
Having perfect ratings is idealistic
We gave too much importance
to rating agencies

20. Ratings should be only one piece