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November 15, 2007
Credit Agencies, Oligopolies, and Free Speech
Frank Partnoy has a smart paper from 2006 on the role of credit agencies in capital markets. They are under increasing regulatory pressure right now, what with a sense in some quarters that the agencies have a modicum of blame for the subprime problems.
My take: It's government that got us into this fix. There is an issuing requirement that bonds/debt/whatever have an attached credit rating from a Nationally Recognized Statistical Rating Organization (NRSRO), which is awfully nice of the government if you're in the oligopolistic credit rating business. After all, no-one says new equity issues must have analyst ratings attached from your choice of Goldman, Merrill, or Citi --what makes debt so damn special?
Go read Partnoy on the issue.
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As a former bond I-banker, there is, in fact, NO requirement that bonds get a rating before issuance. You've never heard/seen an unrated piece of debt?
One of the main complaints of the duopoly is that if you don't buy a rating from them, they rate you ANYWAY and it's a screw job.
Common myth, but I, personally, structured debt that was unrated. This is common in proj fin.