The games played by the ratings agencies are a function of the business model they use (Since Relaxing its Bond Rating Standards, S.&P. Has Seen Its Business Increase. New York Times, Sept. 18 2013: B1, B7).
In their model, the issuers of the financial instruments chose and
pay the rating agencies; thus competition will result in a drive to the
bottom, with raters giving
high ratings to worse and worse debt issues. The problem is that an
investor cannot detect a low quality AAA rating until after the issuer
In my view, there are only two solutions. Either, have the raters
paid by the purchasers of the instruments, perhaps through a tiny Tobin-type
tax, or nationalize the rating agencies and have a government agency
carry out the ratings. I would favor the prior approach as competition
would encourage accuracy in the ratings.
Sent to the New York Times