If Ratings Agencies Disappeared

Question: Do you believe that bonds could one day be like stocks where analysts present their opinions rather than the market relying on the ratings of few agencies? (Dan Indiviglio, The Atlantic Business Channel)

Mark Zandi: Well, I think to some degree that happens now.  I mean, all the folks that work at various investment houses, buy side analysts, do spend a lot of time and energy trying to understand the risk characteristics of bonds and determining whether they are good investments or not.  So, that happens already.  They take the ratings as one other opinion in their decision-making process, whether to make an investment. 

I think, going back to securitization-- that was complex.  That was more difficult for analysts at these investment houses to evaluate in part because they didn't have all the information and data and in part because the securities were really very difficult to understand and so they didn't have the same level of understanding and they didn't do the same kind of due diligence as they did for say, a municipal bond or for a corporate bond, or a sovereign bond.  But I think that's going to change going forward if there ever is another structured finance deal that's done, you'll see a lot more analysis put into it. 

Question: What if ratings agencies disappeared? Would Wikipedia or Google do a worse job? (Tyler Cowen, Marginal Revolution)

Mark Zandi: I think there's a function for rating agencies because in a sense, there is a lot of despaired information and bringing it altogether is very costly and doing good analysis is difficult and you need scale to do it.  Some bond houses are gaining that scale and doing that on their own.  There's the PIMCO's of the world and other big bond houses that have the skill necessary to put together the staff to do the kind of analysis that needs to get done.  But many other investors don't have that scale and the rating agencies, in a sense, provide that for them.  And so, there are scale economies in that kind of analysis and in a sense the rating agencies provide that.

Also, there's a lot more esoteric kinds of bonds and securities that are issued and it always will makes sense to have, I think, something like a rating agency providing an opinion as to the quality of that particular bond or that security.  So, I think there's an economic reason for rating agencies, so I think they will always be around, obviously the role is going to change as a result of events, but I think there will always be a role for them.

Recorded on November 10, 2009

Would Wikipedia or Google do a better job? Moody’s chief economist Mark Zandi weighs in.

Live on Monday: Does the US need one billion people?

What would happen if you tripled the US population? Join Matthew Yglesias and Charles Duhigg at 1pm ET on Monday, September 28.

Ultracold gas exhibits bizarre quantum behavior

New experiments find weird quantum activity in supercold gas.

Credit: Pixabay
Surprising Science
  • Experiments on an ultracold gas show strange quantum behavior.
  • The observations point to applications in quantum computing.
  • The find may also advance chaos theory and explain the butterfly effect.
  • Keep reading Show less

    Learn innovation with 3-star Michelin chef Dominique Crenn

    Dominique Crenn, the only female chef in America with three Michelin stars, joins Big Think Live.

    Big Think LIVE

    Having been exposed to mavericks in the French culinary world at a young age, three-star Michelin chef Dominique Crenn made it her mission to cook in a way that is not only delicious and elegant, but also expressive, memorable, and true to her experience.

    Keep reading Show less

    3 cognitive biases perpetuating racism at work — and how to overcome them

    Researchers say that moral self-licensing occurs "because good deeds make people feel secure in their moral self-regard."

    Photo by Christina @ wocintechchat.com on Unsplash
    Personal Growth

    Books about race and anti-racism have dominated bestseller lists in the past few months, bringing to prominence authors including Ibram Kendi, Ijeoma Oluo, Reni Eddo-Lodge, and Robin DiAngelo.

    Keep reading Show less

    Should you grow a beard? Here's how women perceive bearded men

    Whether or not women think beards are sexy has to do with "moral disgust"

    Photo Credit: Frank Marino / Unsplash
    Sex & Relationships
    • A new study found that women perceive men with facial hair to be more attractive as well as physically and socially dominant.
    • Women tend to associate more masculine faces with physical strength, social assertiveness, and formidability.
    • Women who display higher levels of "moral disgust," or feelings of repugnance toward taboo behaviors, are more likely to prefer hairy faces.
    Keep reading Show less

    Only 35 percent of Americans know the symptoms of Alzheimer's disease

    Yet 80 percent of respondents want to reduce their risk of dementia.

    Photo: Lightspring / Shutterstock
    Mind & Brain
    • A new MDVIP/Ipsos survey found that only 35 percent of Americans know the symptoms of Alzheimer's disease.
    • Eighty percent of respondents said they want to reduce their risks.
    • An estimated 7.1 million Americans over the age of 65 will suffer from Alzheimer's by 2025.
    Keep reading Show less