Quality Assessors as Paradigmatic Rational Actors

Posted April 15th, 2008 by Jerry Ravetz and filed in Ignorance of Ignorance

A brief supplement to my last post, from: ‘Ratings game: As housing boomed, Moody’s opened up’, by Aaron Lucchetti, Wall Street Journal – Europe, April 14, 2008, pp. 16-17.

Bond issuers, knowing that a higher rating means they pay a lower interest rate, have an incentive to shop around among rating agencies. And they have clout as they shop: They are the ones paying the bill…

…“There never was an explicit directive to subordinate quality rating to market share,” says Mark Froeba, a former Moody’s analyst who recently started a bond valuation company that may compete with rating firms. “There was, rather, a palpable erosion of institutional support for rating analysis that threatened market share.” An example would be raising too many legal issues on deals, slowing them down unnecessarily.

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