From the March 2008 issue of Treasury & Risk magazine

Rating the Rating Agencies

After Bristol Myers Squibb blamed the credit rating agencies for misleading it on the quality of mortgage-backed auction rate securities, one hedge fund manager remarked, "This is the land of the grownups," and sophisticated investors should do their own analysis. It was a fair point; any Fortune 500 company--and certainly Bristol Myers--has the wherewithal to analyze any investment. The fund manager is correct to suggest that Bristol executives should not be let off the hook, but wrong to dismiss a situation in which the two principal rating agencies--which have been essentially handed a duopoly by regulators--fail to even come close to properly evaluating the risk in instruments they themselves had a hand in designing.

If the subprime collapse were the agencies first miss, it would be upsetting, but perhaps not actionable. To the contrary, Moody's Investors Service and Standard & Poor's Corp. have arrived at the subprime debacle already bloodied by a long list of bad calls: the Orange County default, the popping of the tech bubble, the implosion of Enron Corp., just to name the most egregious.

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