Credit rating agencies and information asymmetry reduction 2. Rating services market

1. Role of credit rating agencies in international finance • Credit rating agencies and information asymmetry reduction • 2. Rating services market • 3. Main problems of the rating agencies nowadays. The role of credit rating agencies in financial crisis • 4. Credit rating agencies: methodology analyses • 5. The necessity of exchange markets information incorporation in methodology of rating agencies

2. "...There are two superpowers in this world's  - the United States and Moody's.» TheNew York Times

3. Arguments in favor of credit rating agencies 1) provide vitally necessary information to investors; 2) availability of rating increases the liquidity of certain financial instruments; 3) reduces transactional costs; 4) ratings enhances the image of the issuer and creates a positive reputation; 5) ratings serve as an universal tool of risk assessment; 6) ratings made by professionals, which makes their high quality; 7) companies do not need to keep staff of analysts to evaluate financial risks; 8) ratings are independent estimates, which makes their objectivity; 9) ratings are effective informational and promotional tools; 10) rating assignment indicates the transparency and openness of the rating object; 11) rating process helps to identify weaknesses in the object of rating and to correct them; 12) investment firms forming investment portfolio focused primarily on the rating of the issuer; 13) investment often depends on the rating of the investment object. Slide 1

6. Rating agencies, officially recognized in the U.S.: - A.M. Best Company, Inc. - DBRS Ltd. (Canada) - Egan-Jones Rating Company - Fitch, Inc. - Japan Credit Rating Agency, Ltd. (Japan) - Kroll Bond Rating Agency, Inc. - Moody’s Investors Service, Inc. - Rating and Investment Information, Inc. (Japan) - Realpoint LLC - Standard & Poor’s Ratings Services Slide 2

7. Slide 3

8. Number of credit analysts and credit analyst supervisors in the world leading credit rating agencies Slide 4

9. Internal problems and shortcomings in the present existence of credit rating agencies Slide 5

10. External problems and shortcomings in the present existence of credit rating agencies Slide 6

11. General characteristics of the leading rating companies Slide 7

12. Moody’srating procedure I. Analysis II. Preliminary meeting III. Meeting with management IV. The rating decision V. The rating publication VI. The rating monitoring

13. Analysis of the methodologies of the leading credit rating agencies for the purpose of incorporation of market information in the rating process Slide 8

14. Dynamics of Enron stock prices and S&P 500 Slide 11

15. Enron stock price changes and actions of rating agencies on the example of Enron Corp. Slide 12

16. Dynamics of Worldcom stock prices in 1998-2002 Slide 13

17. Analysis of the exchange markets information and actions of rating agencies in case of Worldcom Slide 14

18. Dynamics of Lehman Brothers stock prices 2007-2008 Slide 15

19. Analysis of the stock market information and actions of rating agencies in case of Lehman Brothers

20. Stock information makes a serious impact on the creditworthiness of borrower, and, consequently, to their credit rating. These in particular include: 1 Reputation sensitive business ("Confidence-sensitivity"). 2. Access to capital. 3. Changes in stock prices as signals. 4. Sudden changes in volatility. Slide 17