Provide a 8 pages analysis while answering the following question: Credit Rating Agencies. Prepare this assignment according to the guidelines found in the APA Style Guide. An abstract is required. Moody’s and S&P have helped financial market fairly well giving out expert opinions to public investors. However, during the financial crisis, three big credit rating agencies, S&P, Moody’s, and Fitch were condemned for precipitating the crisis giving high credit rate to CDOs, which were defaulted. Since then, ratings of the agencies became controversial and financial regulators have sought to ways to impose more regulations on those ratings.
Few agencies dominating the rating industry, they are holding too much power in the rating market. This settlement allowed only a few rates in the financial market. If the situation keeps remaining in the rating industry, the more financial crisis will happen in the near future. Thus, to avoid another critical situation, it is necessary to regulate credit rating agencies more strictly, but also necessary to broaden the market allowing more participants. At the beginning of the industry, credit agencies’ rates had a positive impact on financial markets. At that time, many people who didn’t have financial knowledge had difficulties in choosing where to invest their money. The companies who solved the problems were credit rating agencies. They were consisted of financial experts and analyzed companies and gave easily understandable “ABC” rates. According to them, high credit rating which was closer to “As” rates indicates that the borrower has a low probability of defaulting on debt, and conversely low credit rating indicates that the borrower has a high probability of default. Investors could get helped in deciding the companies to invest relying on those rates. Essentially, what they have done is facilitating investments by giving easily understandable reliable sources to judge the risk of investments.
These rates have had a huge impact on financial markets. Since credit agencies have developed and settled in the financial industry, a lot of investors began to consider those rates as an important standard to make investments.