Group Work:

Topic 1: Do we need to regulate credit rating organizations, and if yes, how?

We will develop a presentation in four parts:

1. Rating agencies presentation and history

- History: where they come from and why they have been created

- Presentation of the three most important CROs

- Notation Methodology

2. Problems with CROs

- Duopoly

- Agency problem and Conflicts of interests

- reputational capital and Resource constraints

3. Regulation of CROs

- No regulation before 2006

- CRARA 2006 and the results

- International initiatives

4. Conceivable solutions and consequences

- Market solutions

- Anti-market solutions

- Current concrete proposals

1) Rating agencies presentation and history

The use of credit ratings appeared in the U.S. because of the investing class wanted to have more information about the many new securities – especially railroad bonds – that were being issued and traded. In the middle of the 19th century, the U.S. railroad industry began expanding across the continent and into undeveloped territories. The industry’s demand for capital exceeded the ability or willingness of banks and direct investors to provide it.

In order to reach a broader and deeper capital market, railroads and other corporations began raising new capital through the market for private corporate bonds. The growth in the sale of many different corporate bonds to a broad investing public generated the need for better, cheaper and more readily available information about these debtors and debt securities.

In response to this development, Henry Varnum Poor first published in 1868 the Manual of the Railroads of the United States. His publication contained operating and financial statistics for the major railroad companies, and provided an independent source of information on the business conditions of these corporate borrowers.

John Moody took the process another step forward in