Ratings Agency

• Ratings typically range from AAA (The best) to D (the worst)
• In the early 1900s investors subscribed to ratings agency services
• Ratings agencies provided a 3rd party objective view of a company's credit quality
• In the 1970s ratings agencies became less impartial
• They started to charge companies for ratings( improper incentives)
• Companies would get lower borrowings costs with better ratings
• Since they were paying ratings agencies, they could demand better ratings (or could go use another ratings firm)
• The SEC let Financial Institutions hold less bond capital if the bonds were rated highly 
• Now financial institutions were also incented to make sure ratings were high
• By the late 2000s, ratings agencies were not giving impartial ratings
• May have helped cause the mortgage meltdown
• Proven via emails in Court
• Ended up settling and paying Billion+ Fines

Ratings Agency Criticisms

• They tend to paint a better picture than reality:
• They missed the mortgage security problems of the 2008 crisis
• They may be incentivized to give higher ratings, or lose business to other firms who will