Credit Rating Agency Reform Act of 2006
Categories: Bonds, Regulations, Ethics/Morals
This act was meant to improve the quality of company-credit ratings. It was enacted in the hope that we could avoid the subprime mortgage crisis that almost brought down the finances of the entire country. It worked—in the same way that a scale works in an embarrassing episode of The Biggest Loser.
The idea was that the big 3 agencies—Moody's, S&P and Fitch—were colluding with each other and rating every security as "A-okay." The big-3 then produced a product that wasn't reflective of the real risks inherent in the marketplace. Basically, they had been labeling "pink slime" and hot-dog meat as Grade-A sirloin.
The act made it much easier for smaller firms to compete for business by doing quality research and not being afraid to give bad ratings to bad money-butchers.