If one of the problems with credit rating agencies is that they are officially endorsed by the US government, the solution is presumably not to reinforce their seal of approval.
Yet that is what the Senate has voted to do by establishing a new Credit Rating Agency Board which would decide which rating agencies are qualified to rate structured bonds and then pick which of these qualified agencies do the job in each case.
The move was proposed by Al Franken, the Democratic senator (and former comedian on Saturday Night Live) who is rightly concerned at the conflicts of interest in the agencies’ business model – that they are paid by issuers to rate bonds.
The measure is intended to stop “ratings shopping” among banks that want to issue structured bonds, and eliminate the incentive for agencies to boost ratings to get business.
The trouble is, this is a strange way to go about it. It means that the agencies, as well as being Nationally Recognised Statistical Rating Organisations, will be given a further seal of approval by the Securities and Exchange Commission.
That hardly seems to be the way to reduce their authority in the eyes of investors. A better way to go about it, as I argued the other day, would be to remove their official status altogether and make them more liable for their mistakes in the courts.
