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Thursday, March 4, 2010

A Hand in a House of Cards

The legal efforts to punish the rating agencies are insufficient (A Hand in a House of Cards, New York Times, February 16, 2009. We need to do something so that going forward the agencies' conflicts of interest are reduced.

Let the agencies' paymasters be the investors. Each financial transaction would have a small fee attached to it, like a Tobin tax. These fees would be used to pay the rating agencies; to keep them honest, a portion of the pay would be tied to achievement, that is the medium and long term accuracy of their ratings.

Such a system would eliminate the current conflict of interest faced by the rating agencies who are paid by the very firms/issuers they rate.

It is a great shame that Congress has not yet moved to correct this situation.

Sent to the New York Times

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