Credit Rating Companies – Some Basics

When you search the internet for the largest credit rating agencies you are offered a top 3 led by Moody, Standard and Poor's (S&P) and Fitch Ratings.

S&P is part of a larger company: McGraw-Hill Publisher. And this relation can help to explain some basics about credit rating companies.

Both S&P and McGraw-Hill are publishers and both can be seen as brokers of information. McGraw-Hill's brokerage is focused on different markets in which supply of information (mainly books of writers) is matches with a demand for information (schools and academic institutes).

S&P is in nature not different that the publisher it is part of. But there are a few differences.

McGraw-Hill will publish books in their mission to provide "essential information and insight that help individuals, markets and societies perform to their potential" (source: mcgraw-hill.com).
S&P will publish information that is also essential but for financial decision makers. In the first case the information is a basis for parties to learn in general, in the last case the information influences the financial market movements by influencing the value of investment instruments (bonds and shares of companies).

The authority of S&P and other credit rating agencies is much more important and influencing the financial market, whereas a normal publisher will not influence any markets when issuing new information (except in a few cases). Information from the rating agency must be disclosed so that nobody may use it before others can; Which is called front-running which is an offence.
The time to market of the information of credit raters is much more sensitive, whereas the time-to-market and the moment of issue of a normal publisher is a matter of proper marketing.

Independence is key for the credit rating agency and not a serious topic for the normal publisher.

Sensation is what drives normal publishers to a certain extent; pure objectivity is what drives the rating agent.

Whether the information is coherent, logical and transparent is key for the credit agency (analytic integrity) this is less of an issue for the normal publisher.

Standard & Poor's operates on the principles of

  • Independence, Objectivity, Analytic Integrity, and Disclosure

Standard & Poor's traces its origins to the publication, in 1860, of Henry Varnum Poor's History of Railroads and Canals in the United States, a precursor of modern stock reporting and analysis.
Since that time, Standard & Poor's has continued to deliver on its mission to support "the investor's right to know," (source: standardandpoors.com).

On the website the history of S&P stops at 2005 and with an S&P index of around 1500 (now about 900). We see an index that is rising and rising over the decades. The simple index of 500 companies is one of the fundamentals of billions of dollars that move in the financial markets each minute.

A more in-debt question would be to focus on the nature of objectivity. How could that be determined?

A philosophical remark would be that independence is related to freedom, unattached and the opposite of imprisonment which both fall under the concept of power. How – philosophically speaking – can an agency that may influence the financial world be (free and) really independent and objective?

Source by Hans Bool

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