Credit rating companies are under fire for inherent conflicts. Credit raters are paid by the companies whose credit they rate. See generally Gretchen Morgenson, "House Panel Scrutinizes Rating Firms" p. B1, col. 6 (New York Times Nat'l Ed., Business Day Section, Thursday, October 23, 2008)(published online under the headline, "Credit Rating Agency Heads Grilled by Lawmakers").
Credit rating companies play an important role in rating the credit of Bond Insurance Companies, as has been posted here many times. Without a high credit rating, Bond Insurance Companies have tanked, to put it in the current vernacular.
The current credit crisis is also in large measure a result of Credit Rating Companies not necessarily accurately reflecting the Credit Rating of their sponsors, it is reported. Until recently, investors allegedly depended on the high Credit Ratings assigned by the Credit Rating Companies to guarantors of some securities that now have now value.
For example, Credit Rating Companies are reportedly responsible for triggering a slew of "multimillion-dollar collateral calls" made on Insurance Companies which previously guaranteed the payment of mortgages and other assets. The Credit Rating Companies have only now lowered the guarantor Insurance Companies' credit raitngs, seemingly all of a sudden. This contributes a lot to the current credit fiasco.
The guarantor Insurance Companies are finding to their surprise that 'suddenly' their own credit ratings have been marked down by the Credit Rating Companies. When the Insurance Company's credit rating is downgraded, nervous investors "call the collateral". Nervous investors thus demand payment, now.
A reported example of this dreadful effect caused by credit rating downgrades is AIG. AIG has recently acquired a Federal Taxpayer bailout involving $123 Billion as a result, and may demand more. David Cho, Binyamin Appelbaum and Zachary A. Goldfarb, "Bailout Expands to Insurers" (Washington Post.com, Saturday, October 25, 2008).
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