1 Can We Trust the Bond Raters? MA0N0203 Stan Hu Focus on Ethics

2 Risk evaluation Investor –No time or no expertise for potential bond investment Credit-rating agency service How reliable for their rating?

3 Failure cases Millions of investors –Neglecting to lower Enron, Worldcom and other heading bankruptcy companies rating

4 Reform Act 2006 Credit Rating Agency Reform Act of 2006 –Abolishing SEC’s authority SEC: Securities and Exchange Commission –Designating credit-rating agencies as NRSROs NRSROs: Nationally Recognized Statistical Rating Organizations –A credit-rating company with 3 years of experience, meet some standards, allowing to register with SEC as a “Statistical Rating Organizations”

5 Purpose of Reform Act 2006 To provide additional means for SEC to regulate procedures and the registration of NRSROs issuing credit scores to consumers To provide SEC the tools necessary to hold recognized rating agencies accountable

6 Getting better Performing risk-return analysis (bond market) –Having accurate and timely information Increased scrutiny/examination from SEC along with increased competition –Adding to the value of the rating received by investing public

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