The regulatory spotlight is set to turn to the ratings agencies, the cartel of bond raters whose business is so uncompetitive that they’re actually called agencies, despite being private companies.
They’ve received heaps of scorn for allegedly putting AAA-ratings on every pile of garbage — the fact that they’re paid by the debt issuer makes the whole thing even worse.
The administration has now put together a series of proposed fixes. Consulting relationships between the raters and clients will be banned. More fee disclosure will be required, and debt issuers will need to disclose more information when they go ratings-shopping, taking a debt issuance from agency to agency until they get the rating they like. All of this sounds fine.
But we still have the problem of the Moody’s/S&P/Fitch cartel, and it ignores the demand side of the equation. It’s a mistake to argue that all these AAA-ratings came about due to issuer/ratings agency corruption. The plethora of AAA-rated trash as the result of demand for AAA assets that actually carried a little yield.
In the end, buyers are sophisticated and should be (and were) doing their own due diligence. Simply thinking it’s a matter of reforming (but not even ending) the pay-to-play business model just scratches the surface.
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