How Do We Regulate Credit Rating Agencies?

AAA; via Flickr

Question: How do we supervise and regulate the credit rating agencies which, so poorly and perhaps illegally overrated so many derivatives?

Paul Solman: I don’t know. One proposed reform has been that the investors pay the ratings agencies for their services instead of the securities issuers, as was the case up to the 1970s, I believe. But why would an investor pay if the ratings were publicly available and how could you keep them secret?

Another proposed reform is to make the agencies legally accountable for their ratings. But if that were the case, they might be sued out of existence.

A third proposal: Make the agencies government-run. But are we really going to have a government ratings agency? In addition to government banks, perhaps, and maybe even government-owned auto companies? Which would be rated by the government agency?