The Credit Market Handbook: Advanced Modeling Issues (Wiley Finance)

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Agencies are sometimes accused of being oligopolists , [] because barriers to market entry are high and rating agency business is itself reputation-based and the finance industry pays little attention to a rating that is not widely recognized. In , the US SEC submitted a report to Congress detailing plans to launch an investigation into the anti-competitive practices of credit rating agencies and issues including conflicts of interest. Of the large agencies, only Moody's is a separate, publicly held corporation that discloses its financial results without dilution by non-ratings businesses, and its high profit margins which at times have been greater than 50 percent of gross margin can be construed as consistent with the type of returns one might expect in an industry which has high barriers to entry.

When the CRAs gave ratings that were "catastrophically misleading, the large rating agencies enjoyed their most profitable years ever during the past decade. To solve this problem, Ms. The CRAs have made competing suggestions that would, instead, add further regulations that would make market entrance even more expensive than it is now. From Wikipedia, the free encyclopedia.

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Corporate finance Working capital Cash conversion cycle Return on capital Economic value added Just-in-time Economic order quantity Discounts and allowances Factoring Sections Managerial finance Financial accounting Management accounting Mergers and acquisitions Balance sheet analysis Business plan Corporate action Societal components Financial law Financial market Financial market participants Corporate finance Personal finance Peer-to-peer lending Public finance Banks and banking Financial regulation Clawback v t e. Further information: Credit rating. Further information: Credit rating agencies and the subprime crisis.

Further information: Structured finance. Further information: Sovereign credit rating. Further information: List of countries by credit rating. Further information: Nationally recognized statistical rating organization. Further information: Basel III. A debt instrument makes it possible to transfer the ownership of debt so it can be traded. Campaign ". Council on Foreign Relations.

Retrieved 29 May March 19, Harvard Kennedy School. Retrieved 28 May Overall, my findings suggest that the problems in the CDO market were caused by a combination of poorly constructed CDOs, irresponsible underwriting practices, and flawed credit rating procedures. Federal Reserve Bank of New York. The rating agencies and their credit ratings. Washington, D.

Retrieved 21 September Chicago Tribune. Archived from the original on 14 February Spring Journal of Economic Perspectives. American Economic Association.

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Litan Wilson Chicago: Probus. Retrieved 17 September Rating entered a period of rapid growth and consolidation with this legally enforced separation and institutionalization of the securities business after Rating became a standard requirement for selling any issue in the United States, after many state governments incorporated rating standards into their prudential rules for investment by pension funds in the early s.

Credit Derivatives Pricing Models: Models, Pricing and Implementation

In this era of rating conservatism, sovereign rating coverage was reduced to a handful of the most creditworthy countries. The Washington Post. The American. American Enterprise Institute.

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Archived from the original on 2 November Securities and Exchange Commission. Retrieved 20 September Archived from the original PDF on Retrieved 19 September European corporate governance: readings and perspectives. Retrieved 26 October Accessed January 7, Changes in the financial markets have made people think the agencies are increasingly important.

What is disintermediation? Banks acted as financial intermediaries in that they brought together suppliers and users of funds.

Disintermediation has occurred on both sides of the balance sheet. Mutual funds The third period of rating development began in the s, as a market in low-rated, high-yield junk bonds developed. This market — a feature of the newly released energies of financial globalization — saw many new entrants into capital markets. Credit ratings also determined whether investors could buy certain investments at all. Credit ratings affect even private transactions: contracts may contain triggers that require the posting of collateral or immediate repayment, should a security or entity be downgraded.

Triggers played an important role in the financial crisis and helped cripple AIG. Table 1. Purchasers of the safer tranches got a higher rate of return than ultra-safe Treasury notes without much extra risk—at least in theory.

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However, the financial engineering behind these investments made them harder to understand and to price than individual loans. To determine likely returns, investors had to calculate the statistical probabilities that certain kinds of mortgages might default, and to estimate the revenues that would be lost because of those defaults.

Then investors had to determine the effect of the losses on the payments to different tranches. Archived from the original on October 17, Bush in July to a five-year term. Critics say this created perverse incentives such that at the height of the credit boom in to , the agencies recklessly awarded Triple A ratings to complex exotic structured instruments that they scarcely understood.

They have profited handsomely. Today [] expressions of concern about rating performance — how good the rating agencies are at their business — have become the norm. Newspapers, magazines, and online sites talk continuously about the agencies and their failings. Tulsa World. The concern of the Justice Department's antitrust division was that unsolicited ratings were, in effect, anticompetitive. Huff Post. Retrieved 4 September Investors, including public pension funds and foreign banks, lost hundreds of billions of dollars, and have since filed dozens of lawsuits against the agencies.

The Bond Buyer. CGFS Papers. Committee on the Global Financial System. July Bloomberg Businessweek. Retrieved 5 November In October , the M4-M11 tranches [on one subprime mortgage backed deal the FCIC followed] were downgraded and by , all the tranches were downgraded. Essvale Corporation Limited. Academic Press. Mishkin; Eugene N. White Centre for Economic Policy Research. International Monetary Fund.

October Adrienne Heritier ed. Internal and External Aspects of Corporate Governance. Regulating Wall Street. New York University. Retrieved 11 October Portfolio Penguin. According to the theoretical literature, CRAs potentially provide information, monitoring, and certification services. First, since investors do not often know as much as issuers about the factors that determine credit quality, credit ratings address an important problem of asymmetric information between debt issuers and investors.

Hence, CRAs provide an independent evaluation and assessment of the ability of issuers to meet their debt obligations. In the late s and early s, raters began to charge fees to bond issuers to pay for ratings. October 27, Archived from the original PDF on 14 December Retrieved 30 November The Economist. It is very hard to see how this combination can be justified. Imagine if patients were forced to use doctors whose incomes depended on the pharmaceutical companies, but who were immune from lawsuits if they prescribed a toxic drug.

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Wiley Finance. The Wall Street Journal. US Government Printing Office. Financial Markets and Institutions. South-Western Cengage Learning. Bloomberg Markets Magazine. Retrieved 27 August Brown An Introduction to the Bond Markets.

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    May 24th, Center for Financial Policy. Retrieved 17 December A more recent example is the regulation allowing pension funds to invest in asset-backed securities rated A or higher. The New Masters of Capital. Cornell University. Sy All the Devils Are Here. The agencies had charts and studies showing that their ratings were accurate a very high percentage of the time. But anyone who dig more deeply could find many instances when they got it wrong, usually when something unexpected happened.