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Bond Rating Agencies: Conflicts and Competence


  • Martin Fridson


Faulty ratings of mortgage-related collateralized bond obligations played a prominent role in the financial crisis of 2008. Some critics charge that the rating agencies did not merely make honest mistakes, but were hopelessly conflicted by their practice of collecting revenue from the bond issuers. According to the author, however, that same fee arrangement did not prevent the agencies from achieving considerable aggregate -level accuracy in other segments of the debt market. Given that the bad credit assessments were largely limited to structured finance deals, and that there appears to be no workable alternative to the issuer-pay model, the best prescription for the agencies going forward is likely to be additional safeguards for situations in which the associated conflicts of interest appear especially difficult to manage. Copyright Copyright (c) 2010 Morgan Stanley.

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  • Martin Fridson, 2010. "Bond Rating Agencies: Conflicts and Competence," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(3), pages 56-64.
  • Handle: RePEc:bla:jacrfn:v:22:y:2010:i:3:p:56-64

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    References listed on IDEAS

    1. Francis A. Longstaff & Sanjay Mithal & Eric Neis, 2005. "Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit Default Swap Market," Journal of Finance, American Finance Association, vol. 60(5), pages 2213-2253, October.
    2. Stephen Godfrey & Ramon Espinosa, 1996. "A Practical Approach To Calculating Costs Of Equity For Investments In Emerging Markets," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(3), pages 80-90.
    3. Pereiro, Luis E., 2001. "The valuation of closely-held companies in Latin America," Emerging Markets Review, Elsevier, vol. 2(4), pages 330-370, December.
    4. Donald R. Lessard, 1996. "Incorporating Country Risk In The Valuation Of Offshore Projects," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(3), pages 52-63.
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