Ratings companies, whose scores have helped determine the cost of money for governments and businesses for more than a century, are no longer trusted by the world’s biggest investors, according to the former head of structured finance at Standard & Poor’s.
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“They’re there because people have to have them, not because people believe in them,” David Jacob, who was fired from S&P in December, said in an interview at Bloomberg headquarters in New York. “Maybe retail investors do, that’s the unfortunate part, but I think institutional investors don’t.”
After helping ignite the worst financial crisis since the Great Depression by inflating grades on securities backed by subprime mortgages, the ratings firms’ reputations are being diminished further in the bond market. When S&P downgraded the U.S. government in August, Treasury yields fell to record lows, and the cost of protecting financial debt declined following last month’s downgrades of 15 global investment banks by Moody’s Investors Service.
Jacob, hired four years ago to help restore confidence in S&P, says policy makers haven’t gone far enough to reduce reliance on the ratings companies, granted the authority by U.S. regulators 76 years ago to determine which borrowers deserve credit.
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