Letters to the Editor
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Ridiculous
You're assuming full disclosure was provided every step of the way. We're a looooong way from assuming that.
You would have us substitute the judgement of a government agency that has no experience in the field for the 100+ years of experience Moody's, S&P and Fitch bring to the table. You can only make a case for the incompetence of the Big Three--which you in effect are--if you can prove they routinely get it wrong. In the case of the subprime MBS, yes, they did. But they prove quite capable of rating corporate bonds, municipals and various other debt instruments in that their ratings tend to be validated by performance.
You would create a bureaucracy, with the inefficiencies of government (how's the FDA these days, Andrew? The EPA??) at taxpayer expense. Or, if the government charges for the ratings service, those costs would get passed down all the way to the consumer. All just to give private business a sense of what's worth investing in.
Right now, the government simply prohibits fraud in describing investments. You would have a branch of the government endorse investments--what else could a Aaa rating from them mean? Have you considered the conflict of interest that might arise? Anybody want to guess what Halliburton bonds would be rated under this system??
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Good Idea !
Accounting firms should be nationalized as well as they do the books for these companies for large compensation. Then maybe the corporations wouldn't need two sets (or more) of books, one for the shareholders and one for the IRS.
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ummm..
Where will these competent government employees come from? The SEC has enough trouble already hiring enough good people. If I had the skills to rate a company's creditworthiness, why would I work for the government at half the market rate I could get if I worked for a bank or a hedge fund?
Sacrilegious as it seems here at salon, the free market will sort itself out. Frankly, if S&P and Moody's are allowed to go out of business, that would be great. There is already other rating agencies that are touting their track records. The only sin here is the blessing the government gave Fitch, S&P, and Moody, giving them an effective oligopoly on the ratings game.
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Governments have Clients Too
Its odd you imagine the government agency would not also manipulate ratings for patrimony.
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Just buy them!
Some of the previous posters made it seem that, if the government wanted a nationalized ratings agency, they'd have to build it from the ground up. Why would they do that when they could just buy the current ratings companies to pull them out of the corporate 'profits before anything else' model.
On the other hand, there is definitely weight to the argument that the government has its own model that could be just as bad (the 'votes/campaign contrib/kick-backs before anything else' model).
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Campaign contributions
Many of the bonds being rated are from government agencies -- municipal bonds, state governments, special districts etc. To have the government rate its own bonds would be a conflict of interest (excuse the pun).
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@el diablo
Well put!
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I have a question...
What incentive do these agencies have to encourage them to be accurate?
Mr. Leonard's article explains an apparent incentive for them to bend the truth. We should expect the ratings to be garbage if there is no compensating incentive toward accuracy.
Perhaps it would help if these agencies had some skin in the game. There was a time when I would have accepted an argument that the agencies have reputations to protect, but IMO recent events make this argument implausible.
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@alkaline
The best incentive to be accurate is reputation, followed by what you can charge investment companies and broker-dealers for ratings based on that reputation. If Moody's et al are providing inaccurate grades for bonds they won't be listened to very much--any more than you or I or your Aunt Sally will be listened to about the strength of XYZ Corp.'s subordinated debentures.
Obviously, someone over in these companies was much less than truthful, and the Big Three may very well suffer for it. But I can't see an incentive for these guys to be intentionally misleading over a few greased palms. The cat's out of the bag now. The ratings companies' biggest customers--the broker-dealers--lost their shirts trading those toxic MBSs and careers were destroyed. Heads will roll at Moody's if they haven't already. The Big Three will have to work twice as hard as before to re-establish credibility on the Street.
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@cdunlea
Heads will roll at Moody's if they haven't already. The Big Three will have to work twice as hard as before to re-establish credibility on the Street.
So far I haven't heard any news about shakeups at the rating agencies. Maybe I'm just not reading the right news sources, but I'd expect the news to be getting around if anything was really happening. Loss of investor confidence is a big part of Wall Street's current difficulties, so highly visible efforts to try to restore confidence would seem to be in order. I'm surprised that I haven't seen any.
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Nationalize for quality improvement? You must be kidding!
One thing that can be said of private companies is that they are at least accountable to their shareholders. The shareholders can demand transparency, call for audits, and sack executives at will.
This is simply not true of government agencies. During this administration we've seen individual agencies display the highest level of incompetence with virtual impunity. Should an administration choose to rework them, it will generally do so by placing allies in charge, and restructuring it to its own ends. The only time the shareholders (citizens) get a say in the matter is every 4 years, and these elections are never focused on the small details. An american who voted for Bush can't be said to have had much say in the appointment of Chertoff to FEMA, or his retention after its colossal failure of serving the victims of hurricane Katrina. After convincing the voters to elect it initially, an administration only needs to face a single referendum on its performance to enjoy eight years of free reign. That is if the second term election even qualifies as a referendum, with its issues being framed as broad ideas and decided mostly by gut feelings, rather than being grounded in a rational evaluation of the specifics.
The best way to keep a private agency accountable is to affect its bottom line, and motivate its shareholders to maintain quality control out of personal self interest. All of the businesses that relied on Moody's (and the others) for their objective and accurate ratings have excellent grounds to sue them for failing to deliver the services they claimed to sell. This seems like a simple matter, as the inaccuracy of their ratings at this point is beyond dispute, and the reasons for it aren't material. Be it wishful thinking, willful incompentence, or even a completely blameless and unpredictable failure to execute - they didn't deliver the services they were paid for, and as such have defrauded their customers, who can rightfully demand their money back. Now is the time for the extraction of a pound of flesh, and let that be a lesson to them and their shareholders not peddle snake oil in the future. Make the damages awarded to their customers even a small fraction of what they've lost, and you won't see this happen again easily.