Markets The Credit Rating Agencies pdf

Journal of Economic Perspectives—Volume 24, Number 2—Spring 2010—Pages 211–226

This feature explores the operation of individual markets. Patterns of behavior his feature explores the operation of individual markets. Patterns of behavior

in markets for specifi n markets for specifi c goods and services offer lessons about the determinants and c goods and services offer lessons about the determinants and

effects of supply and demand, market structure, strategic behavior, and government ffects of supply and demand, market structure, strategic behavior, and government

regulation. Suggestions for future columns and comments on past ones should be sent egulation. Suggestionsfor future columns and comments on past onesshould be sent

to James R. Hines Jr., c/o o James R. Hines Jr., c/o Journal of Economic Perspectives, Department of Economics, Department of Economics,

University of Michigan, 611 Tappan St., Ann Arbor, Michigan 48109-1220. niversity of Michigan, 611 Tappan St., Ann Arbor, Michigan 48109-1220.

Introduction ntroduction

In 1909, John Moody published the fi n 1909, John Moody published the fi rst publicly available bond ratings, rst publicly available bond ratings,

focused entirely on railroad bonds. Moody’s fi ocused entirely on railroad bonds. Moody’s fi rm was followed by Poor’s Publishing rm was followed by Poor’s Publishing

Company in 1916, the Standard Statistics Company in 1922, and the Fitch Publishing ompany in 1916,the Standard StatisticsCompany in 1922, and the Fitch Publishing

Company in 1924. These fi ompany in 1924. These fi rms’ bond ratings were sold to bond investors in thick rms’ bond ratings were sold to bond investors in thick

manuals. These fi anuals. These fi rms evolved over time. Dun & Bradstreet bought Moody’s in 1962, rms evolved over time. Dun & Bradstreet bought Moody’s in 1962,

but then subsequently spun it off in 2000 as a free-standing corporation. Poor’s ut then subsequently spun it off in 2000 as a free-standing corporation. Poor’s

and Standard merged in 1941; Standard & Poor’s was then absorbed by McGraw- nd Standard merged in 1941; Standard & Poor’s was then absorbed by McGraw￾Hill in 1966. Fitch merged with IBCA (a British fi ill in 1966. Fitch merged with IBCA (a British fi rm, which was a subsidiary of rm, which was a subsidiary of

FIMILAC, a French business services conglomerate) in 1997. At the end of the year IMILAC, a French business services conglomerate) in 1997. At the end of the year

2000, at about the time that the market for structured securities that were based on 000, at about the time that the market for structured securities that were based on

subprime residential mortgages began growing rapidly, the issuers of these securi- ubprime residential mortgages began growing rapidly, the issuers of these securi￾ties had only these three credit-rating agencies to whom they could turn to obtain ies had only these three credit-rating agencies to whom they could turn to obtain

their all-important ratings: Moody’s, Standard & Poor’s (S&P), and Fitch. heir all-important ratings: Moody’s, Standard & Poor’s (S&P), and Fitch.

Markets

The Credit Rating Agencies

■ Lawrence J. White is Professor of Economics, Stern School of Business, New York University, awrence J. White is Professor of Economics, Stern School of Business, New York University,

New York. His e-mail address is ew York. His e-mail address is 〈[email protected] [email protected]〉.

doi=10.1257/jep.24.2.211

Lawrence J. White