What Is the Best Way to Get Control of the Credit Rating Agencies?

Question: What is the best way to get control of the credit rating agencies who changed this recession into a deep, deep recession (almost a depression) by their unbelievably reckless, immoral and greedy actions?

Paul Solman: Ah, if only I knew. Here are the main problems, and suggested answers. See which you prefer and then I’ll tell you what I think.

The overriding problem, of course, is conflict of interest. The ratings agencies are being paid by those they rate. The incentive, therefore, is to be an easy grader, so the company or government body doesn’t go shopping for a higher rating from one of your competitors. Senator Al Franken has championed a bill to fix this problem by having ratees matched with raters by an independent agency.

Another approach is to remove the current government sanction that almost forces those being rated to use one of the major firms: Moody’s, Standard and Poor’s or Fitch. The government was trying to insure that fly-by-night ratings firms didn’t get into the business. But in granting a oligopoly to just a trio of firms, it lessened competition and worsened the situation. Or so the argument goes.

But without regulation, what’s to prevent new ratings firms from offering even BETTER deals to those they rate? And how is the investor to know what’s going on – until it’s too late? Yes, I know: the market should sort out the bad apples — let the consumer decide. But look where that’s got us.

On the other hand, regulators haven’t exactly distinguished themselves either.

In short, no easy answer here. As usual.