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Case Title:

Rating the Credit-Rating Agencies

Publication Year : 2005

Authors: Indu Prasad & Hansa Iyengar

Industry: Consulting

Region:USA

Case Code: FCP0011B

Teaching Note: Not Available

Structured Assignment: Not Available

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Abstract:
Credit rating started in USA in the late 19th century when early rating agencies began publishing financial analyses on railroad companies. Over the years, numerous regulations were created to govern the level of non-investment grade debt that institutional investors (banks, insurance companies and corporate pension funds) could own. But the turn of the 21st century brought a slew of problems for the credit rating agencies (CRAs) as they failed to detect signals of the collapse of companies like Enron Corp. and WorldCom Inc. The creditworthiness of the rating agencies and validity of the processes and methodologies adopted for rating began to be questioned and demands for strengthening regulations began to be made. The Congress began to pressurise the SEC to re-examine the role of credit rating agencies and proposed greater oversight of the rating firms’ anticompetitive practices and conflicts of interest. A debate on whether subjecting rating agencies to substantive monitoring by the SEC and abandoning the NRSRO designation also ensued. A few critics also proposed establishing a separate regulatory set-up to monitor the rating agencies. The major question revolved around the extent of regulatory involvement in ensuring the safety and soundness of the rating process. Experts felt that these regulations would change the very nature of the rating industry in the US.

Pedagogical Objectives:

  • To discuss what is Credit Rating
  • To discuss the credibility of credit rating agencies
  • To discuss the effective criteria’s to rate companies, shares and bonds.

Keywords : Credit Rating Agencies, Standard 7&, Poor's, Fitch Rating Services, Moody's, Enron Scandal, Fiscal Policy Case Study, WorldCom Scandal, Sarbanes-Oxley Act, US Credit Rating, History of Credit Rating, NRSRO, Credit rating regulations, Dun &, Bradstreet, Credit ratings, Credit rating marketing

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