John Quiggin has spawned a good discussion about the poor performance of financial credit rating agencies at his website.
This produces some absurd results. For example, Ambac, a mortgage insurer whose shares have lost 92 per cent of their value in the past year, is rated at AA by Fitch. By contrast, Greece, a Eurozone member country, is rated A. Does anyone seriously think the probability of default by Greece is greater than that for Ambac? And Fitch is conservative. Moodys and S&P still have Ambac rated as AAA suggesting, to anyone foolish enough to believe them, that the probability of default is negligible.
In the comments Mugwump offers this interesting insight:-
The solution is to get rid of the effective government-granted monopoly on ratings providers. The ratings used for banks, money markets and state pension funds must be assigned by Nationally Recognized Statistical Rating Organizations, or NRSROs.
In order to achieve the NRSRO designation, and organization must be “nationally recognized as an issuer of credible and reliable ratings by the predominant users of securities ratings.”
So you effectively cannot become an NRSRO unless you’re already an NRSRO. Catch 22.
Check it out.