Today I’m seeing a flurry of comment from across the political spectrum targeting the NRSROs. Since 1975 when the SEC changed the rules to require that the debt of publicly-held companies be rated by Nationally Recognized Statistical Rating Organizations, what were originally seven such firms have dwindled by merger to three over the years.
The Rating Agency Model, as it now exists, pays raters on the basis of how much volume they do, not on how well they rate anything. If you are willing to rate pure garbage as AAA no matter what it is really worth, you get a lot more “action” and make a lot more money.
And action the “big 3” got. And everyone, turned a blind eye to the process, because no one likes to end a party, especially a party that whores are throwing with Greenspan and Bernanke cheerleading like a pair of pom-pom girls at the big game.
Michael Hudson, writing at naked capitalism:
The behavior of leading banks and ratings agencies Cleveland and other similar cases – of promising to give good ratings to states, counties and cities that agree to pay off short-term bank debt by selling off their crown jewels – is not ostensibly criminal under the law (except when their hit men actually succeed in assassination). But the ratings agencies have made an compact with crooks to endorse only public borrowers that agree to pursue such policies and not to prosecute financial fraud.
To acquiescence in such economically destructive financial behavior is the opposite of fiscal responsibility. Cutting federal taxes and Social Security payments to obtain a more positive S&P “opinion†would give banks an ability to “pull the plug†and force privatization and anti-labor austerity plans by refraining from rolling over the U.S. debt – and cutting taxes Tea-Party style rather than funding spending by taxation on a pay-as-you-go-basis.
There is an inherent and irreconcileable conflict of interests in the rating agencies being paid by those whom they are rating rather than by prospective borrowers as it used to be prior to 1975. There is simply no way in a real world governed by real human passions and interests in which such a scheme will not become corrupt.
And corrupt it became. During the housing bubble the credit rating agencies routinely gave AAA ratings to debt that events have proven were fall short of the highest level of credit-worthiness.
What good is a credit rating agency whose ratings cannot be relied on? If the salt loseth its savor with what shall it be salted? The NRSROs deserve the same treatment that Arther Anderson received for much the same reasons.
I’ll give Mish the last word:
Please send your congressional representatives an email or fax and tell them to scrap the NRSRO “Nationally Recognized Statistical Rating Organizations” rating entirely, ending the monopoly of Moody’s, Fitch, and the S&P.
