A critique of the credit rating industry

Abstract

Credit ratings have become a fulcrum to all investors; giving credit rating agencies (CRAs) significant pull in the financial world. This paper will examine the efficacy of credit ratings and the institutions behind them. The goal of this paper is to investigate whether the power invested by the market to CRAs is misplaced and should be seceded, or if CRAs are now objective entities that could be trusted. To achieve said goal, a significant amount of secondary data relating to criticisms of CRAs, before and after 2007, will be used. This will allow for a better understanding of CRAs and how they operate. Thereafter, regulations such as the Dodd-Frank and new corporate governance standards will be examined in order to see if the criticisms still hold ground. Finally, professionals who use ratings on a daily basis will be interviewed and questioned about their opinions on various topics relating to CRAs, hence, gauging the level of trust and confidence in CRAs locally and concluding with recommendations for CRAs and regulators.