It’s so weird with Barney Frank. We can’t think of any other politician who alternates so violently between being amazingly off the mark and dead-on in his assessment of things. This morning on CNBC we liked what we heard with regard to the ratings agencies, and how they could be improved by ending the government support of the oligopoly. This is an important point. We’ve deputized the ratings agencies to be de facto arms of the government, and then we’re surprised that they didn’t do their job all that well. And he goes further, saying that new reforms will help spur the creation of buy-side ratings agencies. All good stuff, potentially.
But executing this will be way more difficult. The reason you have government-blessed raters, like Moody’s (MCO) and S&P is that you don’t want any old Tom, Dick, and Harry coming around and slapping a AAA on a big crap pile (granted…). This is important not because buyers would then buy anything (after all, they’re supposed to do their own due diligence, not just rely on ratings), but because these AAA ratings are important for regulatory/capital issues. And the buy side stuff sounds good, too, but then, what’s the business model? You can’t fix the ratings agencies without fixing all the other things, like the AAA-requiring capital regulations at the same time. So while we applaud Frank’s view on this, we think it will be much, much tougher than most people iamgine.