Credit where itís due
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But whether or not the government wins its case against S&P, its decision to file the lawsuit creates a win-win scenario for the functioning of the credit ratings industry. On the one hand, the misaligned incentives generated by the rating agencies' business model were no secret before the lawsuit. A victory for S&P could restore investors' shaken confidence in the analysis underlying its ratings.
If, instead, the government is victorious, investors will be able to rest more easily when relying on a company's credit ratings. Credit rating companies have always tried to assuage investor concerns about misaligned incentives by promising that the credit-rating process is objective and unclouded by improper concerns. Lawsuits like this one force a rating company to put its money where its mouth is; signalling the government's willingness to intervene when a credit agency promises unbiased analysis but does not deliver. Put differently, it tacks a steep price onto what could otherwise be cheap talk.
Goldin is a research scholar at the department of economics at Princeton and is studying law at Yale. Lamba is a research scholar in economics at Princeton and an economist at the office of the chief economic advisor, Union ministry of finance