Analyzing The Conflict Of Interests In The Credit Rating Agencies In The USA

In April 2008, marked with Bear Stearns mergered by JPMorgan, the first Financial Crisis in the 21st century was finally broke out. In this Financial Crisis, the credit rating agencies, which were called the"guardian"of the investors or the"gatekeeper"of the capital market, did not successfully play the role to stabilize the market, and because of their false high rating results, the credit rating agencies were deemed one of the reasons for this Financial Crisis.As the financial regulators in America investigating the credit rating agencies, the real problems of the whole credit rating industry were gradually known by the investors, among which the most serious one was the conflicts of interest in the credit rating agencies. It is the conflicts of interest that made the credit rating agencies did not perform their responsibility to give the investors enough warning and protect the capital market.In this thesis, the conflicts of interest in the American credit rating agencies will be discussed as following parts:First, we will discuss the reason for conflicts of interest in the credit rating agencies. In this part, we will first discuss the root cause of the conflicts of interests in the credit rating agencies through analyzing the history of the credit rating industry and the issuer-pay revenue model. Then the NRSRO will be introduced and we will find out what influence the NRSRO has on the conflicts of interest. At last, we will discuss the famous Reputation Capital Theory, and prove that, in the modern capital market, the Reputation Capital Theory has lost its foundation and impact.Second, we will discuss the problems in the credit rating agencies caused by conflicts of interest. In this part, we will discuss the problems in the credit rating agencies such as invalidation of the internal control system, opacity of the rating procedures and methods, insufficiency of the due diligence on the Underlying Assets, poor rating models and so on.Third, we will discuss the American regulations system on the credit rating agencies and analyze its reliability. In this part, we will arrange the American regulation system on the credit rating agencies and on this basis analyze the current way to control the conflicts of interest. Then we will discuss deeper whether increasing the transparence and the competition will play the role to control the conflicts of interest.Forth, we will give some advices to perfect the regulation system. In this part, we will discuss the feasibility of establishing the government-support credit rating agencies through theory, work model, transparence, management, information source and capital support. According to some queries to the government-support rating agencies, we will make some responses.