The Power of Rating Agencies

Very few people have any reason to be pleased about the financial crisis, but Sean Egan is one of them. "Our business is going like mad," he says, clearly in an excellent mood. According to Egan, his company is doing "better than ever."

Egan runs Egan-Jones, a small rating agency outside Philadelphia. For years, he has been a professional rebel and vocal critic of the three biggest companies in his industry, Moody's, Standard & Poor's and Fitch, known colloquially as "The Big Three." Their business is rating financial products, and they have long dominated the market and continue to do so today. According to Egan, the Big Three make a lot of mistakes.

Lehman Brothers is a case in point. Only a day before the company filed for bankruptcy, the rating agencies were still awarding it their top ratings, namely A, A2 and A+. But Egan took a different view of Lehman, downgrading it to BBB+ half a year before the bankruptcy. Then he removed the plus and added a minus and, finally, one day before the bank, issued his death sentence: CCC. "Investors would have been better off listening to us," he says.