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
has defaulted.
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
