Credit Rating Agencies: Yet Another Toxic Government Influence on Finance

It should come as no surprise that the credit ratings agencies, which gave irrational ratings to what turned out to be worthless assets, are heavily influence by the government: A Triple-A Idea:

‘The disease has spread,” says University of San Diego law professor Frank Partnoy, in remarks to be delivered today at the Securities and Exchange Commission. He’s talking about the sickness in financial markets caused by the federal government’s decision to select certain companies to judge credit risk. Instead of a free market judging the likelihood that a particular bond will be repaid, regulation by the SEC and Federal Reserve forces market participants to use the government’s hand-picked experts at Standard and Poor’s, Moody’s and Fitch.

Mr. Partnoy argues that the financial meltdown could have been avoided if these anointed ratings agencies had never slapped their triple-A seals of approval on collateralized debt obligations (CDOs). Without the comfort of AAA, investors would have wondered how they could possibly have evaluated the mortgages buried deep inside these opaque securities.

Virtually everyone who has reviewed the causes of the meltdown has concluded that credit ratings were a major factor. Yet most in Washington now claim the core problem is that issuers of securities pay the major rating agencies for their analysis. Regulators now focus on managing this conflict of interest, but they appear unwilling to address the much larger conflict of interest: To wit, that the major ratings firms assess the creditworthiness of the U.S. government, even as they depend for their profits on the special status bequeathed by the government.

Read the whole thing, remember it the next time someone knee-jerksĀ  “collateralized debt obligations ” as the root of the financial crisis.

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