One of the major causes of the Great Recession was the failure of the ratings agencies (S&P, Moody's, Fitch) to properly rate securities. In order to secure business the agencies did not publish unbiased ratings; they gave AA ratings to securities that should have been unrated or D. It looks like this practice is starting to return.Well, the practice has definitely returned. One measure is the number of analysts who have moved from the credit-reporting agencies to investment bankers. SEC records show more than 300 have done so since 2008. That's in a universe of 4,000 analysts. So, about 7.5% of credit-reporting analysts have gone to the companies who issued the securities these analysts rated. And, it looks like the number is increasing as 80 moved in 2014.
Since there is no rule establishing a waiting period for analysts moving to a company you were rating, the question becomes: can credit analysts be impartial about grading bonds while looking for employment at banks that underwrite them?
A study by some academics found that "when an analyst is hired by one of the top 20 banks, rankings rise by 0.35 level on average compared with an average 0.18 grade increase for all analysts switching positions. If that bump-up elevates the bond to investment grade from a speculative, or junk, rating, the borrower would save $85 million in interest over the life of a $1 billion 10-year bond, according to data compiled by Bloomberg."
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