The issuer of a bond pays the rating agency to rate the bond? Conflict of interest?
Why doesn't a defendant just pay the salary of the judge presiding over his case?
That would certainly make no sense! The same way that a rating agency making its money from the issuer whose bonds they rate makes no sense.
How can the rating agency possibly be 100% objective when they want to get repeat business from the issuer?
The answer is that they can't be, and yet that is the system for rating bonds, and it has always been the system.
However, in the case of the 2008 financial crisis that included a massive dollar amount of AAA rated crap (CMBS) and a huge number of investors around the world hurt by this system, the problem is now too great to be ignored.
For investors who rely on these ratings that have been proven to be worthless, this AAA rated episode has been at the very least a violation of the public trust and a grossly exaggerated example of bypassing a fiduciary responsibility.
Very funny video explanation of the bond rating process! Just one more of Wall Street's dirty little secrets!
First let me say that the holier than thou attitude of the participants in the video, particularly Dylan Ratigan, seems somewhat disingenuous.
Dylan Ratigan has spent a great many years on business television and I don't recall any outcry from him about this obvious conflict of interest in the past (although I may have missed the show that day).