A Good Idea

Representative Paul Kanjorski D-PA has proposed that the federal rule be dropped that requires credit ratings to determine what an asset is worth, and therefore determine capitalization. Representative Kanjorski’s intent is to distance the Federal Government from a de facto endorsement of ratings agencies’ work. In its own right, this is a worthy goal.

But dropping this rule, which dates from the Great Depression would have a far greater consequence. The unanswered question is: What will replace NRSRO ratings.

Although a good move, this rule change is still nibbling around the edges of the reform that’s needed at the ratings agencies. Until the business model is changed so securities issuers are no longer paying for their own ratings, the value of those ratings will be forever suspect.