Credit where itís due
- All attempts being made to free soldier in Pakistan captivity: Rajnath Singh
- SC cancels Mohammad Shahabuddin's bail, orders police to take him into custody
- Congress and I stand by PM Narendra Modi: Rahul Gandhi on surgical strikes
- Bihar liquor ban: Patna HC strikes down govt's prohibition law, terms it 'illegal'
- LIVE: PM Modi calls second Cabinet Committee on Security meet
Why, irrespective of the outcome, the US government's lawsuit against Standard & Poor's is good for the credit ratings industry
After years of speculation, the United States department of justice filed a lawsuit against Standard & Poor's, the world's largest credit rating agency, to the tune of $5 billion last week. The 128-page document places the actions of S&P front and centre in the events of 2008 that brought down the market for residential mortgage-backed securities, leading to the global financial crisis. According to the justice department, S&P is liable for such a large fine because it "knowingly, and with the intent to defraud, devised, participated in and executed a scheme to defraud investors"ó those market participants who relied on its credit ratings to guide their investment decisions.
To date, the rating agencies have largely avoided accountability for their role in the financial crisis through a combination of favourable legal precedent and timidity by the authorities. But recent judicial decisions in the US suggest that the defences successfully relied upon by rating agencies in the past, including the freedom of the press under the First Amendment, may be less effective going forward. The lawsuit is anything but timid. These developments bode well for the future of the credit ratings industry and thus for financial markets throughout the world.
To understand how the S&P lawsuit will improve the credit rating industry, let's go back to basics. A credit ratings agency is a group of financial analysts and journalists who evaluate the quality of the debt issued by governments and firms. They come up with a credit rating that summarises how likely the entity is to pay back what it borrows. Both Moody's and Poor's (which later merged with Standard Statistics to form S&P) got their start by selling information to investors. In the 1970s, however, the industry shifted its business model towards borrowers, charging them a fee for each security they rated. S&P's defence will be based on this change: it merely disseminated opinions that issuers sought; investors did not pay them and were not bound to adhere to their opinions.
- The emergence of Akhilesh Yadav as a popular leader is an indicator of the same-old in the SP
- Poverty caused by expenditure on health has doubled in India in the past 15 years
- India’s aggressive response to Nawaz Sharif’s lies at the UN was a clear indicator of the things to come
- Let’s not allow debate about what it means to be Indian to be held hostage to jingoists and bigots
- People, policymakers can be led by subtly influencing their choice architecture
- Edit - Defining moment