Rated XXX

While the reform bill has gone through, there is still a lot of cleaning up to do. The WSJ talks about firms that can still shop around the ratings agencies, getting the best “deal” for themselves:

In the wake of the financial crisis, the companies that rate bonds have been lambasted for being asleep at the switch and for assigning rosy ratings to questionable mortgage bonds in order to win business. Those ratings companies have made numerous changes, but one thing remains the same: Issuers still “ratings shop” among firms for the most favorable opinions on deals.

The fate of ratings-shopping now hangs in the balance. The financial-regulation overhaul bill passed by the Senate on Thursday would limit the ability of bond issuers to pick firms to rate their securities. But the House version of the bill contains no such provision, and some key lawmakers have raised concerns about the idea. It remains to be seen whether the proposal will survive as the two chambers begin efforts Monday to reconcile their differences. [link]

Quite simply, paying agencies to rate something for you is a clear conflict of interest. This is a huge problem, and poses serious future risks. We shall see what develops, but methinks not too much is going to change down the line. Maybe next time…

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2 comments for “Rated XXX

  1. Aaron Russo
    June 7, 2010 at 1:06 pm

    I think the easiest solution is to have investors pay for ratings. That would line up the interest of rating agencies with the investing public instead of with the companies they rate. If Morgan Stanley pays millions of dollars to Fitch for their rating on Wal-Mart, I’m pretty sure fitch is going to make sure that’s an accurate rating, otherwise they’ll just go elsewhere…

  2. Jennifer Hoe
    June 7, 2010 at 8:25 pm

    I completely agree. I challenge anyone to find a more obvious conflict of interest than the one that exists for rating agencies. There would be serious consequences for the same level of conflict in other industries (legal, anyone?) I find it hard to believe that even after the financial meltdown, passing reform in this area is still challenging.

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