The rating agencies play a huge role in the financial markets, supposedly providing unbiased opinions on a company’s or country’s ability to repay its debt by assigning it a letter grade.
Are they reliable? Of course. They’ve reliably failed to predict every single financial crisis in modern times.
The truth is, the raters are about as far from unbiased as you can get. They’re big, profitable businesses that get paid by the very same entities they rate. So when a banker throws a bunch of mortgages into something called a mortgage-backed security, the rating agency asks the bankers for permission to rate the bonds. The bankers then decide, based on the rating, whether to hire the agency. Bankers want ratings, and raters want big fat fees.
Since 2008, even after Congressional inquiries, investigations, and lots and lots of hand-wringing, the same sordid system still exists today because bureaucrats in D.C., mainly at the Securities and Exchange Commission, believe the rating agencies are a necessary evil.
Keep that in mind the next time you see a “Triple-A rating.”
Charles Gasparino is a Senior Correspondent at Fox Business Network and a columnist for Men's Fitness. Follow him on Twitter.