Question

There is a debate on conflicts of interest that exist between certain bond ratings agencies, such as Moody’s and Standard & Poor’s, and the corporation’s bonds that they rate. There is also a debate on conflicts of interest that exist between financial firms, such as Goldman Sachs and J.P. Morgan, and the corporation’s equity that rate. Discuss strategies that would reduce these conflicts of interest.

Answer 1

Strategies to reduce conflicts of interest that exist between certain bond ratings agencies, such as Moody’s and Standard & Poor’s, and the corporation’s bonds that they rate:

1. Unsolicitated ratings to be given by the rating agencies to securities they were esentially not hired to do.

2. The Securities and Exchange Commision to monitor the ratings given by these rating agencies very closely.

3. In case of discrepencies, serious actions like revokement of rating rights to be done by the Securities and Exchange Commision of a nation.

4. The number of rating agencies to be increased to prevent monopoly in ratings by the limited agencies.

5. Sentiment analysis of the ratings to be done in order to gauge the street acceptance of the ratings.

6. Internal and External audits to be done on the rating agencies at regular interval of times.

7. Capping of fees of the rating agencies for the servies they provide to their customers.

Strategies to reduce conflicts of interest that exist between financial firms, such as Goldman Sachs and J.P. Morgan, and the corporations equity that they rate:

1. Increase in the number of financial firms (large, medium and small ones) and individuals to provide the services esentially being provided by the firms and thus, giving their stance lesser weightage.

2.  Capping of fees of the financial firms for the servies they provide to their customers.

3. Close monitoring on the possibility of insider trading by the employees of these firms by the Securities and Exchange Commision. Serious penalties to be imposed for the same.

5. Electronic alternatives for fund raising processes like IPOs, FPOs, etc.

6. Internal and External audits to be done on the financial firms at regular interval of times.

7. Restrictions to be imposed on the customers as per which they can not switch between firms for a given period of time (contractual basis).