New evidence indicates that inflated credit ratings are once again contributing to chaos in the financial markets.
Steve Hall, Legal Director and Securities Specialist for Better Markets, notes that credit rating downgrades have been appearing almost daily as the pandemic roils markets and the economy. And the evidence suggests that many of those ratings were inflated in the first place as the dominant ratings firms continue to boost their ratings to please their clients and maintain a steady stream of business. Especially troubling are the downgrades for loans to already highly indebted companies and the complex “collateralized loan obligations” that are created from bundles of those risky loans.
Better Markets released a detailed fact sheet that highlighted the damage that inflated credit ratings can do on the economy. In the fact sheet, Better Markets called upon the SEC to “eliminate once and for all the powerful conflicts of interest that corrupt credit ratings, hurt investors, and set the stage for financial crisis.” In the 2010 Dodd-Frank Act, Congress required the SEC to fix the problem by implementing a new assignment system for the most complex products or “asset-backed securities.” But the SEC never implemented such a system.
However, there is hope of some progress being made in this area, according to Hall, who notes that the SEC’s Investor Advisory Committee met on May 21 to discuss credit rating agencies.
“We commend the Investor Advisory Committee for putting credit ratings agencies on the agenda for its meeting,” Hall says. “Congress has charged the Committee with advising the SEC on its regulatory priorities, including protecting investors, promoting investor confidence, and maintaining the integrity of the securities markets. We urge the Committee to spur the SEC to fully and finally address the conflicts of interest that corrupt credit ratings, hurt investors, and intensify financial crises.”
View more of our work on credit ratings.