Credit ratings agencies still under fire for their role in the GFC. Here's the Herald with the latest thoughts.

The essential conflict many of these agencies face is described here:

Critics want the cosy club inhabited by the three big credit ratings agencies to be replaced by a system with more accountability to investors, and less crippling conflicts of interest.

So what can be done to fix the credit rating agencies, seen by many as the unsung villains of the crisis?

Some suggestions include holding the firms responsible for their opinions in the courts, breaking up the oligopoly, and cutting investors' reliance on ratings. None is foolproof but each attempts to address the conflict of interest that was brutally exposed by the credit crisis.

A credit rating from one of the big three firms is virtually indispensable for companies looking to raise debt on the market. But it is now clear the incentives in the current system were skewed to encourage agencies to provide as many ratings as possible, at the expense of good advice.

For decades issuers have paid for the ratings because they need them most, and it has been in the agencies' interest to approve as many ratings as possible. However, the Bank for International Settlements says growth in structured finance - complex bundles of corporate debt - created huge systemic risks for this arrangement.

Credit ratings agencies (finally) facing the music?

Adele Ferguson in the Australian highlights some of the upcoming legal proceedings involving the credit ratings agencies, particularly with respect to the 'sub-prime' mortgage backed securities. Not too soon, either.

Here's the start:

THE spotlight is about to return to the culpability of credit ratings agencies in the global financial crisis following a decision by the biggest pension fund in the US to sue over "wildly inaccurate" ratings on the $US600 billion ($750bn) of synthetic derivatives sold to investors.

This, coupled with a court case to be heard in NSW Federal Court this week, could open the floodgates for third-party litigation against the credit rating agencies. It should also corral the regulators into finally doing something about the so-called independence and enormous power of agencies such as Moody's Investors Service and Standard & Poor's.

From the comments below - a link to a guest lecture by Brad Walters, General Manager, Financial Analytics, Corporate Scorecard held at the Australian School of Business, UNSW:

More reform pushes for credit rating agencies

And they need it, too. Though to say that they 'caused' the GFC is attributing a bit too much blame, I think.

Richard Glayas in the Oz.

Credit rating agencies / subprime / Citigroup

Still more on credit ratings. Turns out the mathematical models used by banks such as Citigroup to value securities like the securitized (sic) subprime mortgages (CDOs, or collateralised debt obligations) relies heavily on credit ratings. That led to the situation where (as we've discussed in class) a downgrade by a ratings agency becomes somewhat self-fulfilling. Wall Street Journal "Heard on the Street" article (via the Oz) here . [Note: this is one of the early benefits of News Corp buying Dow Jones. The Australian gets access to the Wall Street Journal. Goodbye AFR?

Credit analysis

More discussion about the potential problems with relying on credit ratings agencies. Lawrence Summers argues:

There is room for debate over whether the errors of the ratings agencies stem from a weak analysis of complex new credit instruments, or from the conflicts induced when debt issuers pay for ratings and shop for the highest.

But there is no room for doubt that the ratings agencies dropped the ball. In light of this, should bank capital standards or countless investment guidelines be based on ratings?

Credit ratings - worth the paper?

Are the credit rating agencies doing their job well? Stephen Ellis, in discussing the 'sub-prime' mortgage market in The Australian, thinks not. Key quote:

And although S&P and Moody's seem to have been the victims of at least some fraudulent misrepresentation of mortgage quality by originating lenders, it seems fair to ask why they were not checking this information in the first place, given sub-prime mortgages were a startling 20 per cent of the entire US home mortgage market last year.