Fitch’s US downgrade: The principal-agent problem in modern finance

FITCH Ratings’ downgrade of US sovereign credit from AAA to AA+ highlights a latent principal-agent problem in modern financial markets: Investors have outsourced much of their risk management to the rating agencies.

But the problem goes beyond just risk management and the rating agencies. Before Standard & Poor’s reduced its credit rating for the US in 2011, financial contracts referred to “risk-free” or liquid assets as AAA-rated securities.

Considered “good collateral”, these assets were a requirement in most financial transactions.