This website uses cookies to ensure you have the best experience. Learn more

Rating Agencies And Financial Speculation Essay

4788 words - 20 pages

Università degli studi di torino |
Rating agencies and financial speculation |
An analysis of the protagonists of the world market |
|
Elisa Valenti |
Matricola 711323 |

|

INDEX
The protagonists of the world market | 2 |
A particular source of power: rating agencies and country rating | 2 |
Conflict of interest? | 4 |
Other issues of concern * Barriers to entry and lack of competition * Transparency | 555 |
The importance of reputation | 6 |
What went wrong? | 7 |
The need for regulation | 7 |
Can we trust the rating agencies? * The Enron Case Study * The Parmalat Case Study | 889 |
Are rating agencies guilty? | 12 |
The sinister power of ...view middle of the document...

Soon a new problem emerged, that is the conflict of interests. To respond to how many worried about the reliability of rating agencies, organizations in charge of monitoring were instituted: the NRSROs (Nationally recognized statistical rating organizations). To become a NRSRO, a rating organization had to fulfill some requirements difficult to achieve. But regulations had also a side effect: not many agencies were able to fulfill the requirements and the number of rating agencies decreased consistently, creating a market very little competitive.

A particular source of power: rating agencies and country rating

Regarding their role vis-à-vis developing countries, the rating of country and sovereign is particularly important. As defined by Nagy "Country risk is the exposure to a loss in cross-border lending, caused by events in a particular country which are – at least to some extent – under the control of the government but definitely not under the control of a private enterprise or individual". Under this definition, all forms of cross-border lending in a country – whether to the government, a bank, a private enterprise or an individual – are included. Country risk is therefore a broader concept than sovereign risk. The latter is restricted to the risk of lending to the government of a sovereign nation. However, sovereign and country risks are highly correlated as the government is the major factor affecting both. Rare exceptions to the principle of the sovereign ceiling – that the debt rating of a company or bank based in a country cannot exceed the country’s sovereign rating – do occur.
The failure of big CRAs to predict the 1997–1998 Asian crisis and the recent bankruptcies of Enron, WorldCom and Parmalat has raised questions concerning the rating process and the accountability of CRAs and has prompted legislators to scrutinize rating agencies.
Rating explained | | |
Interpretation | Moody | Standard & Poor’s | Fitch |
| Long term | Short term | Long term | Short term | Long term | Short term |
Investment-grade ratings | | | | | | |
Highest credit quality | Aaa | | AAA | | AAA | |
High credit quality | Aa1Aa2Aa3 | Prime-1 | AA+AAAA- | A1+ | AA+AAAA | F1 |
Strong payment capacity | A1A2A3 | Prime-2 | A+AA | A1 | A+AA | |
Adequatepayment capacityLast rating in investment-grade | Baa1Baa2Baa3 | Prime-3 | BBB+BBBBBB | A2A3 | BBB+BBBBBB | F2F3 |
Speculative-grade ratings | | | | | | |
SpeculativeCredit risk developing,due to economic changes | Ba1Ba2Ba3 | | BB+BBBB- | B | BB+BBBB- | B |
Highly speculative,credit risk present,with limited margin safety | B1B2B3 | Not prime | B+BB- | | B+BB- | |
Highdefault risk,capacity depending on sustained,favourable conditions | Caa1Caa2Caa3 | | CCC+CCCCCC-CC | C | CC+CCCCCC-CC | C |
Default,Although prospect of partial recover | Ca, C | | C, D | D | C, D | D |

Source: Based on Moody's, Standard and Poor's and Fitch.

Conflict of interest?

...

Other Papers Like Rating Agencies And Financial Speculation

Captial Budgeting Paper

1803 words - 8 pages impact on the nation’s economy. Most business rating agencies work to provided market risk analysis. Rating agencies are in place to provide an initial rating and monetary reports for local and government activities. The rating system assigns a letter rating that describes the financial position for that firm. Structured finance and securitization have increased from the panic of 2008 (Rozeff, 2009). From that many financial institutions that were

Inside Job - Review

2210 words - 9 pages JOB Complex systems of investment were created, which tied everything from mortgages to credit up in the risky practices of the financial services industry. This resulted in inflated speculation and unethical practices by the nation’s leading finance, insurance and credit rating agencies, leading to the 2008 economic collapse. Some of the prominent Wall Street professionals/Academicians in the Bush Government and back to the Wall Street: 2

Timken Case Study

644 words - 3 pages it comes to how to finance the acquisition. Timken is afraid that if they take on anymore debt they will cause credit agencies to downgrade their investment-grade rating. The challenge now lies in developing a financial plan that will allow Timken Company to acquire Torrington without dropping its investment grade. II Alternative Choices 1. Finance with all equity 2. Finance with all debt 3. Finance with mixture of debt and equity

The Big Short

1325 words - 6 pages another such crisis in the future. Works Cited Diamond, Dougas, et al. “Fixing the Paulson Plan.” The Wall Street Journal 20 Sep. 2009: 1. Online. Paulson, Henry, et al. “The Department of the Treasury Blueprint for a Modernized Financial Regulatory Structure.” The Department of Treasury. March 2008. Web 20 April 2012. < http://www.treasury.gov/press-center/press-releases/Documents/Blueprint.pdf> “SEC Examinations Find Shortcomings in Credit Rating Agencies' Practices and Disclosure to Investors.” U.S. Securities and Exchange Commission. 8 July 2008. Web 20 April 25, 2012. < http://www.sec.gov/news/press/2008/2008-135.htm>

2008 Financial Crises

2556 words - 11 pages associated with certain CMOs. It is debated that such a modelling approach by rating agencies misled investors about the true associated risks. In the early part of 2000, the exposure of financial institutions and banks to such mortgage backed securities increased dramatically. For example, Gold Sachs during 2004 and 2006, issued about 318 CMO’s having a value of dollar 184 billion. Rise in default rate of home loans, breakdown of CMO values

Case Analysis Rcc

2410 words - 10 pages popularity * Six primary cruise line brands * Asia’s large population market * Moderate growth in the U.S. economy Threats * Cruise ships are heavily regulated * Different countries have different laws and regulations * Environmental impacts of large ships * MARPOL laws and regulations * Rising fuel costs * Slow recovering world financial crisis * More efficient competitors Step 4 Critical success

Inside Job

602 words - 3 pages insurance companies (AIG, MBIA, AMBAC) and the three rating agencies (Moody’s, Standard & Poor's, Fitch). Investment banks bundled mortgages with other loans and debts into collateralized debt obligations (CDOs), which they sold to investors. Rating agencies gave many CDOs AAA ratings. Subprime loans led to predatory lending. Many home owners were given loans they could never repay. During the housing boom, the ratio of money borrowed by an

Training and Development

2431 words - 10 pages rating agencies and financial guarantors)? θ Does it have the servicing process and systems that can meet the more demanding standards of the asset backed market? θ Is the originator willing to undertake a complex, time consuming transaction to obtain a broader, potentially cheaper, ongoing source of funding? Are the Assets Suitable? The Pool of assets should have: • Volume which is sufficiently large and homogenous to

Islamic Banking Instituitions

2040 words - 9 pages institution counterparty risk for treasurers. * Seminars on the analytical principles employed by rating agencies. 5. Liquidity Management Center (LMC) To enable Islamic financial institutions to manage their liquidity through short and medium term liquid investments that are structured in conforming to the Shariah laws. The LMC was established for the purpose of facilitating the investment of the surplus funds of Islamic banks and financial

Financial Fiasco

1442 words - 6 pages obligations. - How securities largely based on mortgages of inferior quality obtained excellent grades from the credit-rating agencies - convincing most people that the financial market had finally discovered the secret of alchemy - how to turn lead into gold. - Why if we really want to make future financial storms less severe, we should start by abolishing bailout plans and deposit insurance, so that banks would be forced to think

Controversial Issue

1006 words - 5 pages retirement price. Carrying Value < Retirement Price => Loss Carrying Value > Retirement Price => Gain Bond Rating [pic] What Does Bond Rating Mean? A grade given to bonds that indicates their credit quality. Private independent rating services such as Standard & Poor's, Moody's and Fitch provide these evaluations of a bond issuer's financial strength, or it’s the ability to pay a bond's principal and interest in a timely fashion. [pic

Related Essays

The Economic Function Of Credit Rating Agencies

2590 words - 11 pages rating agencies. As a result, markets have placed more confidence in the conclusive results of the review procedure as it is seen as another level of information to financial markets. Credit Rating Agencies The purpose of credit rating agencies is to offer investors valuable information about the creditworthiness of countries, business entities, and securities. Credit rating agencies have appeared from investor’s need for quality and

Credit Rating Essay

3037 words - 13 pages investors, financialintermediaries and other end- users, do not pay for it. The issuer of the financial instrument pays feesto the credit rating industry and this is the major source of revenue to the rating agency. FUNCTIONS OF CREDIT RATING AGENCIES 1. Superior information 2. Low cost information 3. Basis for proper risk, return and trade off 4. Healthy discipline on corporate borrowers 5. Formulation of public policy

Advanced Banking Credit Rating Agencies Essay

3531 words - 15 pages Introduction 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

Fair Value Measurement Essay

898 words - 4 pages -model valuation, most investors rely on the report from bond rating agencies for options. But under the credit crisis, even the most authoritative rating agencies continually lower the venture capital rating of various financial instruments and negate previous judgement, so do the issuers of financial products who created the models. In the trend of financial globalization, any small turbulence will initiate Butterfly Effect. This follows the