Hedge funder Bill Ackman thinks that a return to the basics is the way to go to improve the financial system–especially when it comes to rating agencies.
Reuters reports that Ackman said today that there should be less reliance on the agencies and that there will be no meaningful financial reform without changing the way they do business.
“They won’t be as profitable, but they’ll be a lot more careful.”
This thought is similar to the one Barney Frank made this morning regarding ending the rating agencies oligopoly and the government support of it.
As we wrote today, as a more competitive landscape would’ve probably helped minimize the failures – and this is a great fist step.
However, the problem with rating agencies runs a bit deeper than that.
As we’ve noted, the buy-side also wanted inflated credit ratings.
As John Carney wrote: “Why would buyers want poor quality ratings? Because many fixed-income investors are constrained by regulations or bylaws in ways that make them desire highly-rated securities that have outsized yields. These regulations created a market demand for poor quality ratings.”
So until these deeper regulatory problems are addressed, yes, the best way to go about fixing the rating agencies is to reduce our reliance on them. Unfortunately, this will take major regulatory changes and many regulators seem distracted by plans to create a super-regulator or clamp down on Wall Street pay.