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Friday, July 2, 2010

Rating Agencies

Andrew Ross Sorkin fails to explicitly offer the simple answer to how to avoid conflict of interest by the rating agencies (Answers On Ratings Are Overdue, New York Times (Business Day), June 1, 2010: B1, B2).

Let the agencies' paymasters be the investors. Each financial transaction should 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 does not yet seem to be moving in a direction to correct this situation.

Sent to New York Times

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