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Sunday, April 25, 2010

Rating Agencies

We need action, not studies (As Lawmakers Grapple With Financial Oversight, They Call For More Studies, New York Times, March 17, 2010: B3).

It is clear that we must remove the conflicts of interest currently existing in the way that Rating Agencies are compensated.

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 New York Times

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