Credit rating agencies play a key role in todays and the last century’s financial life. Their function is to analyze and then publish country’s and firm’s or basically any financial entity’s/product’s creditworthiness. However, their defining impact on today’s economics is goes way beyond their definition.
The Three Big, Moody’s, S&P and Fitch are in possession of 95% market share, that means the competition is negligible. The lack of competition multiplies their individual effect on the markets and raises the question of whether they work with the moral standards today’s stakeholders are expecting from them. (The Role Played by Credit Rating Agencies in the Financial ...view middle of the document...
(The Credit Rating Controversy, Christopher Alessi, Roya Wolverson, and Mohammed Aly Sergie, Council on Foreign Relations, 2013)
In the next paragraphs a closer look will be taken onto the nature and history of the Three Bigs. Furthermore, the reasons and circumstances of the Three Bigs contribution to the crisis will be taken under scrutiny, concluding with the changes in their rating methods after the crisis, mentioning the possible pitfalls they shall avoid in the future.
The history of the Three Bigs
"The Fitch Publishing Company was established by John Knowles Fitch, in 1913. He was 33 year old investor who had just started to continue his parent’s printing firm. Fitch had an unusual objective for his company: to publish financial data on stocks and bonds.
By the year of 1924, Fitch expanded the services of his firm by creating a system for rating debt instruments looking at the company’s ability to repay their obligations and fulfill their liabilities. Even though Fitch’s rating system of grading debt instruments later turned out to be the standard for other credit rating companies, Fitch is now the least relevant of the “big three” firms. " (Investopedia, A Brief History of Credit Rating agencies)
John Moody and Company first published "Moody's Manual" in 1900. The manual contained basic statistics as well as general data regarding stocks and bonds of numerous industries. From 1903 until the stock market crash of 1907, "Moody's Manual" has been published nation wide. In 1909 the company began publishing "Moody's Analyses of Railroad Investments", which added analytical information about the value of securities. Taking the next step on the road of credit agencies this led to the 1914 creation of Moody's Investors Service, which was to provide ratings for almost every government bond markets at the time. By the 1970s Moody's began rating bank deposits and commercial paper taking the role of a modern scale-rating agency. " (Moody’s, History)
Standard and Poor’s
To talk about the history of S&P we have to return to the 18th century. In 1860, Henry Varnum Poor's published History of Railroads and Canals in the United States. After the turn of the century, the Standard Statistics Bureau started to offer information on US companies. Furthermore, in 1916, it began to assign ratings to government bonds and to corporate bonds. By the year of 1941, the two companies merged, becoming the Standard & Poor's Corporation, which was sold to McGraw-Hill in 1966.
S&P is mostly known for the ratings it provides for the debt and structured-finance transactions of states, firms, governments, and institutions. Anyhow Standard and Poor’s is also well recognized for its illustrious S&P 500 Index that has been used around the globe as the benchmark for US’s financial performance. The firm maintains numerous different indices as well, embracing the S&P Europe 350, S&P Global 1200, and so as the S&P Global Equity Indices. To...