“The Credit Rating Controversy ” Reflection, Finance Essay

Reflection of The Credit Rating Controversy
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Reflection of The Credit Rating Controversy
“The Credit Rating Controversy” by CFR staff was published on the Council on Foreign Relations on February 19, 2015. The article shows how three agencies of credit rating, the Big Three, namely Standard and Poor’s (S&P), Moody, and Fitch played a role in the international money crisis. The primary objective that led to the formation of these organizations was to provide reliable and accurate information portraying the riskiness of different kinds of debts. Instead of striving to achieve their goals, credit rating agencies failed and exacerbated the international financial crisis by defrauding investors. Besides, many investors relied on the ratings provided by the Big Three in making strategic decisions. Credit rating agencies offered unfavorable and inaccurate evaluations and approved risky-mortgage-related securities. For this reason, they misled the financial market resulting in a crisis that would have been prevented if they played their roles transparently.
The author presents various ideas in the article. First, the individual shows the ineffectiveness of credit rating agencies. These organizations failed to play their roles well, which misguided investors who relied on the information they offered, showing the riskiness of different types of debts. Second, the big three institutions contributed to the controversy of the sovereign debt ratings. The creditworthiness of some countries was downgraded, such as Austria and France, while others, such as the United States of America (USA), remained at the top-tier AAA. Besides, AAA is the safest and highest credit rating (CFR Staff, 2015). Moreover, the most significant thing that fostered the global moeny crisis was the lack of transparency by the Big Three. In other words, there were no specific metrics known to investors, which these credit agencies used in rating the creditworthiness of countries. Consequently, they misled investors who over-relied on them while making financial decisions.
The author supports the idea of regulating credit rating agencies to facilitate competitiveness and transparency. For example, the entry of new firms in this sector will enable the Big Three to change positively so that they can maintain their market share. During the Barrack Obama’s administration, the president sought to diminish the roles of credit rating agencies after S&P made a $2 trillion error in deficit projection. In 2015, the same agency paid $1.37 billion to settle a case. Additionally, it paid $125 million to the California Public Employees’ Retirement System in another lawsuit (CFR Staff, 2015). As such, a close analysis of these agencies reveals that they do not hold their responsibilities well. Nevertheless, t...