Ratings Agencies & Structured Securities

The SEC's investigation of the ratings industry continues and the latest target on their hit list is the rating of structured securities. The headlines suggest that the Commission may go so far as to ban the three top ratings agencies. Moody's, the S&P and Fitch from rating such securities at all. All three of these firms help to advise investment banks on the design of such securities, so how can they be trusted (by investors) to also provide impartial evaluation of their risk-and-return profiles?

What's more interesting, and possibly valuable, to investors, however, is the SEC's suggestion that the ratings agencies be required to make available all the data that goes into the ratings so that other firm (and possibly private investors?) be able to make their own determinations based on the very same information. In my previous studies about statistics we were often presented with research papers that claimed one result or another based on some analysis. What I often found quite interesting, however, was when such papers were later refuted by further analysis of the same data by other analysts.

As is often said, statistics can be massaged to say almost anything that you want. I can't help but think that ratings agencies are simply statistical analysts with an especially bring spotlight on their research reports. Data mining, the practice of scouring through numbers to find a particular trend or pattern, is a well known practice; try it for yourself. If you use enough data, I promise you that you can find any patter or trend that you want to find if you look hard enough and make the 'appropriate' assumptions. I think that the skill to analyze data yourself is invaluable and the news that more data may be made available to the public at some time the future will only help individual investors willing to put in the time and effort to make up their own minds about an investment.