Credit ratings can be rented, shifting risk onto investors who trust them.

Evidence

In the latest twist, new low-grade securities that have no record “rent a rating,” purchasing a guarantee for payment of principal and interest from a reputable insurance company. “Lacking time to do thorough analysis of the entire project, overworked credit analysts simply look to the quality of the guarantor and then, if the firm is respectable, issue an investment grade rating.” Investors see the AAA rating and lose their shirts (Willoughby 1986). — Shapiro, Susan P., The Social Control of Impersonal Trust, 126

Categorization

• XREF: Foreshadows the 2008 mortgage meltdown and monoline insurers; connects to modern rating-agency critiques. — connects to: Principals spread risk through loans, reinsurance, and swaps to curb agent abuse. — Shapiro, Susan P., The Social Control of Impersonal Trust, 36; Credit rating firms now function as regulators whose ratings corporations actively negotiate around. — Shapiro, Susan P., The Social Control of Impersonal Trust, 105; Market confidence is inductive expectation reviewable against dealer behavior (+4 more)
• SEED: An essay angle: the ‘rent-a-rating’ maneuver as a recurring financial scheme, from 1980s surety bonds to today’s reinsurance shell games.

Related

• Credit rating firms now function as regulators whose ratings corporations actively negotiate around. (similarity 0.80)

Broader Connections

• Reputation can substitute for legal enforceability in evaluating contracts. #contradicts (0.80) — Lisa Bernestein, Opting out of the Legal System, 213
• Market confidence is inductive expectation reviewable against dealer behavior #corroborates (0.75)
• A guarantor’s reputation rests on asymmetric information holdings #expands (0.75)