Abstract
Credit ratings agencies (CRAs) are prone to various antitrust and conflict-of-interest problems that arise from their regulation and their business and compensation models. CRAs have played a critical role in global capital markets for the last few decades, and the inefficiencies inherent in the compensation contracts, and business models of CRAs were clearly illustrated during the Global Financial Crisis of 2007-2011, during which ABS trusts and some large companies suddenly defaulted without prior downgrades of their ratings – it's well known that markets often price in potential defaults or down-grades before CRAs revise their ratings downwards. This chapter explores the inefficiencies of the existing and proposed CRA business models and compensation models.
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