It’s still not clear. Why on earth after learning how badly the credit ratings agencies fell down on the job is the government still trying to prop up the S&P (MHP), Moody’s (MCO), Fitch oligopoly? It makes no sense.
Now only have they demonstrated deep flaws, but it’s logical to assume that their highly protected status has left them little incentive to improve or innovate.
Yet the government keeps feeding the beast, as the agencies are set to receive at least $400 million in work through the $1 trillion TALF program.
Connecticut AG Richard Blumenthal is angry and wants to know what they’re being rewarded for.
USA Today: Blumenthal sent a letter to Federal Reserve chief Ben Bernanke, asking him to revise the program. Blumenthal said the process “contradicts and undermines Congress’ intent to enhance competition,” and “rewards the very incompetence … that helped cause our current financial crisis.”
Federal Reserve spokesman David Skidmore said: “We have received the letter and are considering a reply.”
Blumenthal subpoenaed all three agencies for documents and information that relates to the rating agencies’ “possible influence on TALF rules that steer them business.”
Not surprisingly, the head of Egan-Jones, a ratings agency that’s not part of the oligopoly, is taking some shots too, saying: ‘It is outrageous that the very firms which facilitated the credit debacle are now being rewarded for their ineptitude.”
This issue has gotten less attention than it deserves. The idea of creating an oligopoly may have made sense under a certain logic. You have these regulations that require entities to invest in AAA-only securites, and you don’t want any old Tom, Dick or Harry to set up a ratings agency and call a security AAA. That makes some sense. So you bestow magical privileges on a select few. But whoops, turns out they abuse their position and do a crappy job.
Time to start over, not just hope it’ll be better this time.