James Surowiecki, in the New Yorker, writes on business, the markets, and the economy. His article for September 21, 2009, concentrates on the power of credit rating agencies and the ways they are entangled in the financial regulatory system.
Of especial concern is the impact of a ratings downgrade. Surowiecki refers to a 2007 article in Business Week which describes how two mortgage-backed bonds were downgraded from AAA to CCC in a single day--a cataclysmic fall from top quality to junk.
Surowiecki goes on to say
As I mention in my column, one of the more curious aspects of the rating-agency controversy is that big investors, many of whom were arguably burned by the recent performance of the agencies, remain supportive of keeping them as regulatory gatekeepers. This study by academic Viktoria Baklanova explains why so many investors think the current system is superior to any that could replace it, and argues that the investors are right.Viktoria is one our research students being supervised by Joe Tanega and myself. I'm sure her research on credit rating agencies will continue to have an impact and add to the discourse on their role in financial markets.