Question

PROMPT:  The article contains a passage which says:  David Jacob, who joined S&P in 2008 to head its structured-finance sector, says he ran monthly reports explaining to his boss why S&P wasn’t selected to rate deals. The answer was almost always that its criteria were tougher than another’s.   “Little by little it weakens,” says Mr. Jacob, who lost his job in a reorganization in 2012 and is retired. “If you have the tightest criteria, who’s going to use you?…The incentives are wrong. They stayed wrong.”

Comment on the market for bond ratings, including who should pay the rating agency that does the work to rate the bonds

Answer 1

Bond ratings are an essential component of investment as foreign investors often look at the bond ratings of the foreign economy, before investing in those country's bond market. For example a US individual wants to invest in the government or corporate bond of a foreign emerging economy. Now the ratings agencies assess the markets for all such economies and then rate the soverign bond, these ratings are based on whether the country is risk-free, whether the return is assured which all depends on the debt burden and fiscal deficit on which the country is running. All these features are considered in the bond rating. The bond issuers should pay the ratings agencies whenever its rated. For example a government/corporate is coming up with a bond issue, these players pay the ratings agencies in order to seek a credit rating so that foreign players will invest in their bonds based on the universal rating mechanism.