Undue credit

DAVID EINHORN, a hedge-fund manager, saw the financial crisis coming and made a fortune from it. But not all his predictions have been as prescient. Asked in 2012 about rating agencies, which, unlike him, had failed to discern the impending disaster, Mr Einhorn said, “It’s a matter of time before they all disappear.”

After all, the three big rating agencies, Fitch, Moody’s and Standard and Poor’s (S&P), had all judged Lehman Brothers a safe bet until the morning of the day it defaulted; they also gave high ratings to securities based on subprime mortgages that turned out to be toxic. “Deeply disappointing,” was how Ray McDaniel, the boss of Moody’s, described its performance.

In response, politicians vowed to change the industry beyond recognition. They handed the job of regulating them to new outfits: a special unit of the Securities and Exchange Commission (SEC) in America and the European Securities and Markets Authority in the European Union. A provision of America’s Dodd-Frank financial-reform law, enacted in 2010, states that any requirements in regulation for a security to be rated should be expunged. For...

via The Economist: Finance and economics Business Feeds

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