Standard & Poor's: how much does a credit rating cost

Rating agencies are the entities that become most recognizable during the most difficult times for most states and their companies. Their names are on everyone's lips: Fitch Rating, Standard & Poor's, Moody's. Especially now, in the era of economic instability, when country ratings are being actively downgraded and upgraded just as actively.

Despite the fact that the names of rating agencies are recognizable, not everyone knows what the essence of their activity is, as well as where they came from in the first place. Very often their work is viewed very negatively, because downgrades credit ratings seldom can it be perceived otherwise than negatively. Many people believe that the agencies' activities have long ceased to be purely indicative and have long since taken on a political connotation. Let's try to understand this with the help of examples, starting with, probably, the best-known one. Standard & Poor's rating agency.

Standard & Poor's Rating Agency: History of Origins

It all started back in 1860 with a simple study by Henry Varnum Poore. The idea was quite simple: the U.S. domestic market was actively developing, but there was no direct access to it for European investors, which caused a certain dissonance. In order to facilitate the task of understanding the situation with investments in the U.S. infrastructure, it was necessary to create some indicative instrument that would bring maximum clarity to the financial situation.

Seven years later, Henry Poore and his son open Poor's Railway Manual Company, which later becomes Poor's Publishing Company and publishes financial information on American infrastructure (railroads and canals). Another 39 years later, the Standard Statistics Bureau appears under the leadership of Luther Blake. It is also engaged in providing financial information but not to European investors but to American companies. It was Luther Blake's company that started assigning credit ratings to corporate entities as well as sovereign debt obligations, although it happened 10-15 years after the start of the company.

Two other important dates for the future of the rating agency are 1941 and 1966. In 1941, the merger of Poor's Publishing Company and Standard Statistics formed Standard & Poor's. In 1966 the company was acquired by MGraw-Hill, Inc.

Investment or incentives?

So, all the activities of Standard & Poor's rating agency were originally reduced to providing relevant financial information, but have undergone significant changes during the existence of the organization. Although the assessments made by the agency, and pretend to objectivity, as have a very specific mechanism of formation, without a certain amount of distrust of the activities of agencies is difficult to do without. The reason is this: it is known that initially and until the early 1970s, all agencies produced bond ratings, getting paid for it from investors or potential investors who wanted objective information about the solvency of securities issuers.

However, after the 1970s, the Big Three credit rating agencies, including Standard & Poor's, began to be paid not by investors, but by securities issuers. Quite logically, this phenomenon led to criticism and accusations that the agency could not remain impartial under this scheme. In fact, many investors equated this arrangement to bribery: the more a securities issuer pays, the higher rating it can receive.

The economic impact of this phenomenon, as well as the activity of the agency itself, can be very weighty and have quite serious consequences. Even if we do not take into account the fact that the downgrading of the country's sovereign rating by Standard & Poor's, which is considered the undisputed leader among the "Big Three," puts significant pressure on the national currency of the state, various state companies may also suffer, since the rating of companies and corporations cannot exceed the sovereign rating of the state.

We can also observe consequences of a different order of magnitude. Assuming the "purchasability" of credit ratings to attract investors, Standard & Poor's could well be blamed for some part of the 2007 U.S. mortgage crisis, when some mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) were priced very high by the agency. The high valuation attracted additional funds in them, where investors were individuals as well as organizations and foundations, but a succession of defaults has greatly devalued their investments.

One way or another, with the opinion rating agency Standard & Poor'sThe S&P 500 index, which has been in existence for such a long time and which, by the way, gave traders the S&P 500 index, has to be reckoned with. Its influence is enormous, and the situation is unlikely to change in the near future. However, it should not be forgotten that no evaluation, even the most pretentious one, can be totally objective, which means that ratings should be used, in my opinion, as an indicative tool, which they were from the beginning, but not as a dry guide to action.