Because rating agencies are paid by CDO issuers while the ratings' main users are buyers, the agency as agent has an incentive to issue high ratings to satisfy its issuer principal, and the buyer has no means of controlling the agency other than through its relationship with the issuer.
Source quote, verbatim
The rating agency as the agent would probably have an incentive to issue high ratings to satisfy the issuer of a CDO as its principal. The buyer as the beneficiary of the rating has no means of controlling the rating agencies and its ratings other than through its relationship with the issuer.
From
Kaal, Hedge Fund Valuation Retailization, Regulation, and Investor Suitability (2009), V.A.2 Moral Hazard of Rating Agencies, p. 42 https://ssrn.com/abstract=1428387 · source PDF
Cite as
Kaal, Hedge Fund Valuation Retailization, Regulation, and Investor Suitability (2009). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1428387
Holds when
under the issuer-pays model for structured finance ratings
Classification
mechanismsupport: arguedinstitutional-design
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