Ratings Agencies: How to Solve a Classic Conflict of Interest

[Dover]

That the ratings agencies labor under a conflict of interest is hardly news, but the SEC has just gotten around to declaring it so.

Standard & Poor’s, Moody’s Investors Service and Fitch Ratings — the dominant names in the ratings game — failed to identify risks in investments tied to high-risk subprime mortgages, the SEC found today. The omnipresent conflict is that the agencies are paid by the firms whose bonds they rate. It gets worse where credit-agency analysts take part in fee discussions, as the SEC report found they have at times.

But even if there is no direct analyst involvement, all the rating agents know who butters their bread.

Of course, the SEC has its own proposed solution, but it’s piecemeal, unsystemic and probably won’t do much to fix the problem. The commission’s suggested rules would ban the rating agencies from advising banks on how to package securities in a way that would secure favorable ratings. And it would bar gifts of more than $25 from clients.

Fortunately, as conflicts of interest go, this one is actually pretty easy to solve. Here’s how:

cont'd

http://industry.bnet.com/financial-services/100063/ratings-agencies-how-to-solve-a-classic-conflict/?p=63