Among the institutions not affected by the regulatory overhaul: The ratings agencies, accused of handing out oh-so-many AAA ratings.
NYT: While the administration is proposing some modest changes, none addresses what many see as the central problem: Services like Moody’s and Standard & Poor’s are paid by the companies whose securities they are evaluating. It is as if Hollywood studios paid movie critics to review their would-be blockbusters.
Despite calls to shake up the ratings establishment, the industry’s “issuer-pay” system is deeply entrenched. And, while the services have taken some steps to mitigate conflicts, they reject the idea that they should have been more vigilant.
“This is not an effort to remake the industry,” Jerome Fons, a former managing director of credit policy at Moody’s, said of the administration’s proposals. “If we believe the system is broken, this doesn’t offer a fix.”
In fairness, we think it might be something of an overstatement to say that they were “central” to the crisis, but they obviously played a role.
But realistically, we’ve probably boxed ourselves into a corner with respect to these guys. The problem is, we have a lot of officialy policy that relates to their ratings. Various institutions have to hold AAA-rated assets. In the TALF, the Fed has to buy AAA-rated securities only. And on and on it goes. Going after the ratings agencies at this point would likely look the government’s war on Windows, even as public-sector websites demanded that users access them using Internet explorer. Easiest to just leave the monopoly in place and hope that, well, they do better this time.