Monday, February 16, 2009

Credit Rating Agencies - The One Business That The Government Should Run

I am not a fan of the government running businesses and I am even less of a fan of the rating agencies, who are even less able to demonstrate any degree of competence whatsoever.

Here is the problem, they are in the business of providing ratings and they charge the company for the pleasure... do they make a sale or give a good rating?

When you speak to them they have actuarial style tables that investments have to fit into to be rated and then they charge you between $50-250,000 for the rating. In my opinion if you get ratings from three agencies which is pretty normal you end up with $150-750,000 in fees which significantly reduces your yield unless you put together huge funds/ portfolios or deals to justify the costs. The bigger and more complex the deal the less opportunity they have to truly vet an investment or even to be able to understand it. With offshore structures, tax mitigation strategy and complex structures the people scrutinizing the deals are not exactly a location for the cream of the investment, financial acumen gene pool.

The government would have no bonus structure, no side interest and therefore may hopefully have a little less bias if no greater understanding of the deals. Truly what we need is a more astute investor assessing the validity of deals, the problem is that deals are not clearly explained and defined. This would end the perpetual cycle which currently occurs where companies spend huge amounts of money on a rating and cook every figure they know the agency will look at to make sure they get the right rating. (the consultants specializing in this cost about another $50-150,000) The government would be able to avoid so much of this situation..........

Copyright Jonathan Rose 2009 - Creative Commons License

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