The End of Ethics and A Way Back: How To Fix A Fundamentally Broken Global Financial System

Chapter 3

The Continued Rating Agencies Game: Will Rating Agencies Be Reined in for the Sake of Global Market Stability?

Truth will lose its credit, if delivered by a person that has none.

—Bishop Robert South

In today’s markets, investor confidence, counterparty trust, and reputational risk are critical to the longevity of capitalism, sustainable investment, and the effective spread of globalization. Without investor faith in the world markets that connect us, our financial system crumbles, stock markets descend into death spirals, and banking institutions struggle for liquidity injections.

CEOs, CFOs, risk managers, and government treasury departments are charged with ensuring that their balance sheets are solvent and that investors, shareholders, and market participants can trust in their long-term legitimacy. To prevent worst-case scenarios, good governance and internal controls are essential.

Yet, in the last five years, an external force has dropped an atom bomb on the best-laid plans of boards of directors, risk managers, and sovereign governments. In the name of their own bottom line, credit rating agencies have selfishly flexed their muscle through “pay-to-play” agreements for golden AAA ratings and downgraded seemingly stable sovereign governments. Slight differences in credit rating can decrease the stock prices of private companies, erode investor confidence, and destroy institutional reputation. Because of this phenomenon, rating agencies have taken advantage by asking ...