The Paradox of Credit Ratings

Credit ratings pose an interesting paradox. On one hand, credit ratings are enormously valuable and important. Rating agencies have great market influence and even greater market capitalization. Credit rating changes are major news; 2 rating agencies play a major role in every sector of the fixed income market. Credit ratings purport to provide investors with valuable information they need to make informed decisions about purchasing or selling bonds, and credit rating agencies seem to have impressive reputations. The market value of credit ratings was confirmed on September 30, 2000, when Moody’s Corp. became a free-standing publicly-traded entity. The market capitalization of Moody's as of April 2002 was more than $6 billion.