Are Smaller Rating Firms Repeating 2008?

Key Concepts

• Credit Rating Agencies (CRAs): Firms that assess the creditworthiness of borrowers, particularly regarding debt securities. Includes both large, established firms (Fitch, S&P) and smaller, newer firms (Egan Jones).
• Asset Managers: Companies that manage investments on behalf of others (e.g., Blackstone, Apollo).
• AAA Rating: The highest possible credit rating, indicating the lowest risk of default.
• 2008 Financial Crisis: A severe worldwide economic crisis triggered by the collapse of the housing market and related financial instruments.
• Creditworthiness: The assessment of a borrower’s ability to repay debt.

The Shift in Credit Rating Agency Landscape

The traditional dominance of the “big three” credit rating agencies – Fitch, S&P, and Moody’s – is being challenged by a significant rise in the market share of smaller rating firms. Large asset managers, such as Blackstone and Apollo, are increasingly relying on these smaller agencies. This shift is driven by the smaller firms’ ability to offer faster and more flexible service. The data clearly demonstrates this trend, with smaller agencies now handling a substantial portion of the credit rating business.

Performance Comparison: Large vs. Small CRAs

The disparity in output between large and small CRAs is striking. Egan Jones, for instance, operates with a team of only 20 analysts yet issued over 3600 credit ratings in 2024 and has already issued 3400 ratings in 2025. In contrast, the larger agencies, despite employing significantly more rating agents, issue a fraction of that number. This raises concerns about the thoroughness and diligence of the larger agencies’ rating processes. The speaker directly questions, “How careful do you think they’re really being?” given the volume difference.

Historical Context: The 2008 Financial Crisis

The speaker draws a direct parallel to the 2008 financial crisis, highlighting the potential risks associated with lax credit rating standards. The crisis was, in part, precipitated by the widespread issuance of AAA ratings for complex financial products that ultimately proved to be highly risky. The speaker points out that the large agencies at the time “had all these justifications for a trip AAA rating that exploded in everyone’s face and caused the great financial crisis.” This historical example serves as a cautionary tale, suggesting that prioritizing speed and volume over rigorous analysis can have devastating consequences.

Implications and Concerns

The increasing reliance on smaller rating agencies, while offering benefits like speed and flexibility, introduces potential risks. The speaker implicitly suggests that the sheer volume of ratings issued by firms like Egan Jones could compromise the quality of their assessments. The comparison to the 2008 crisis underscores the importance of accurate and independent credit ratings in maintaining financial stability. The core argument is that a focus on quantity, as evidenced by the output of smaller agencies, may come at the expense of quality and thoroughness, potentially repeating past mistakes.

Synthesis

The video highlights a significant shift in the credit rating industry, with smaller agencies gaining prominence due to their speed and flexibility. However, this shift raises concerns about the potential for compromised quality and echoes the failures that contributed to the 2008 financial crisis. The speaker’s central message is a warning against prioritizing volume over rigorous analysis in credit rating assessments, emphasizing the critical role these ratings play in the broader financial system.