Rating Agencies Struggle

Your discussion of the continuing failure of the rating agencies fails to mention the one real reform that would provide incentives to the agencies to provide accurate assessments (The Trade: Post Crisis, A Return To Old Habits, New York Times, January 6, 2011: B1, B11).

The agencies should be paid by the consumers of their information, not by the institutions whose products they are rating. There is no other market wherein the producer pays for a product's ratings.

What is needed is a small tax on every financial transaction. This tax would be used to pay the rating agencies. Pay would be based on performance. If a product received a higher rating than it deserved, the rating agency would forfeit its compensation.

This would remove the current conflict of interest in the market for ratings.


Sent to New York Times