Recently, Morningstar announced a large acquisition aimed at making it more competitive with and possibly gain entry into the S&P, Moody’s and Fitch ratings oligopoly.

But what does Morningstar have to offer that would allow it to achieve this goal?

S&P, Moody’s and Fitch have already shown they are willing to assign high ratings to opaque securities.  No place was this more evident than the subprime securities at the heart of the Great Financial Crisis.  These rating firms testified before Congress they were willing to assign high ratings without the information needed to know if the ratings were appropriate.

Their business model hasn’t changed since the financial crisis.

Rather than engage in a race to the bottom with these rating firms, Morningstar could have chosen to be a disrupter.  It could have done this by joining the Transparency Label Initiative.

The Initiative disrupts the rating firms by pointing out which securities the rating firms have given a high rating to that are actually opaque (and therefore, the rating is not indicative of the underlying risk as the securities’ opacity prevents a legitimate risk assessment).