Barnier said the agencies did not consider sufficiently that Greece is a member of and backed by the European Union.  ”Analyzing the ratings of Greece, which is part of a solidarity group, is not the same as assessing the rating of an isolated country,” he said.

New legislation governing the ratings agencies is now at the top of the list of new rules that the EU plans to develop and implement this year.

“We have to measure the effects of the legislation that will be implemented this year,” Barnier also added that the sector lacks transparency and competitiveness. “There are too few agencies in too few hands,” he said. “We’ll work with the players of the sector to increase competitiveness.”

Great plan. If you don’t like the outcome, change the rules.

CalPERS is accusing the rating agencies of “negligent misrepresentations to CalPERS and CalPERS’ money manager agents, which have caused and will cause CalPERS to suffer substantial investment losses” by overvaluing the SIVs.

CalPERS claims that the agencies were the “only entities” outside those managing the SIVs who knew what assets were held by the opaque structures.

This is hilarious! CalPERS, a huge expert pension fund, was duped by too high of a rating? The California Treasurer complains the muni ratings of the NRSROs were too low!! This all looks like blame shifting.

Taking aim at what they call a “permanent conflict of interest,” proponents of the amendment argue that this would make it more impartial as well as open up competition to smaller firms. The bipartisan proposal has received widespread support, including the endorsement of the Consumers Union consumer advocate group.

The rating agencies have unanimously come out against the amendment. “We believe the benefits of the issuer-paid model, combined with appropriate regulation, can far outweigh any potential conflicts of interest,” said Standard & Poor’s spokesman Ed Sweeney.

This is a bad idea (how come every problem can be solved with more government?). The only guys in America who didn’t know or understand this conflict existed were Franken, Schumer, Wicker, and Nelson. The new Board name should be aligned with the usefulness of the idea: Credit Rating Agency Panel.

When speaking on French radio Europe 1, French Economy Minister Christine Lagrade said that France will reinforce control over the rating agencies. “I think certain rules should be fixed … because we don’t degrade a country under the conditions that its rating has been degraded, that’s to precipitate purchases of sales 15 minutes before the close of trading, deplorable for the solidity of the market,” she explained.

In an interview with Le Monde, she also said that the downgrade 15 minutes before markets closed was “crime inducing” because it created a panic among those holding Greek bonds who thoughtlessly offloaded the investments before markets closed, driving values down even further.

Previous European Commissioner for Internal Market Regulation Michel Barnier expressed the opinion that rating agencies should be “disciplined and responsible in their evaluation process.” Mr. Barnier, also of France, had also mentioned that the European Union was considering creating Europe’s own rating agency to balance the valuation opinions of the American agencies.

Vive la France! This is like blaming the thermometer for the heat.

Mr. Buffett said rating agencies “made the same mistake” that everyone else did in overvaluing the health of the housing market. However, he countered, Moody’s — as well as McGraw-Hill, Standard & Poor’s and Fimalac SA’s Fitch Ratings — possess strong pricing power and require little in capital needs.

“There is obviously a backlash against rating agencies,” he said. “If they are not forced to change the whole structure around them … in some dramatic way, [they are still] a pretty darn good business.”

Mr. Buffett also pointed out that Berkshire has “never paid any attention” to credit ratings for bonds. “We don’t think we should farm out — outsource — investment judgment,” he said.

David Weinfurter, a spokesman for Fitch Inc., defended his company by saying it had made its models public in response to demand for increased transparency. He also pointed out that a committee, not the models, ultimately assigned ratings.

“There’s a bit of a Catch-22 here, to be fair to the ratings agencies,” said Dan Rosen, a member of Fitch’s academic advisory board and the chief of R2 Financial Technologies in Toronto. “They have to explain how they do things, but that sometimes allowed people to game it.”

An investment bank that needed a rating for a structured mortgage product, for example, would submit a request for a rating agency to the credit board.  The board would then assign which rating agency would do the work.

The idea has been controversial. The goal is to break up the cycle of credit rating agencies providing inflated ratings to get repeat business. Opponents object to the intrusion of government and its bureaucracy into the ratings process and claiming that the process would still not necessarily lead to more accurate ratings.

A government ratings assignment board would slow down credit formation and make it more expensive. All market participants know that issuers “shopped” ratings. This is only news to D.C. The government ratings assignments will only slow down the process, for the worse.

Commission President Jose Manuel Barroso has stated that a European credit rating agency is another possibility. “We are looking at the idea,” he said. “Is it normal to have only three relevant actors on such a sensitive issue where there is a great possibility of conflict of interest? Is it normal that all of them come from the same country?”

Any proposals along these lines are not expected before September.

Bad idea. Leave credit evaluation to the market participants. Eliminate NRSRO designations. Ban governmental endorsements of rating agencies. Delete the use and reference to ratings.

Apropos of the report that 91% of AAA-rated, residential mortgage-backed securities issued in 2007 and 96% of similar securities issued in 2006 have now been downgraded below investment grade to junk status, the Commission asked Buffett what he thought of the provision in the bank reform bill that would regulate rating agencies.

Buffett responded that while he “hated” the current system, he wouldn’t go so far as to outright support the measure. “I don’t know the answer to that,” he said. “The wisdom of somebody picking out raters, is that going to be perfect? I don’t know.”

He added that, “When rating agencies come to Berkshire, they have me by the throat. I have no leverage whatsoever. If there were 10 agencies and I took the cheapest one, people would say ‘You took the cheapest, but they didn’t do the work,’ so it’s not an easy answer.”

Buffet’s testimony can be seen at: http://www.cspan.org/Watch/Media/2010/06/02/HP/A/33689/Financial+Crisis+Inquiry+Commission.aspx

Paul Krugman, writing in The New York Times, believes that those emails reveal a deeply corrupt system.

In one email, a Standard & Poor’s employee explains that they needed to “discuss adjusting criteria” used to evaluate housing-backed securities “because of the ongoing threat of losing deals.”  Another regrets needing “to massage the sub-prime and alt-A numbers to preserve market share.”

The emails leave little doubt that the inherent conflict of interest in the rating agencies’ business model impacted risk assessments. Consequently, the financial system unknowingly took on more risk than it could responsibly handle.

No legislation is currently being considered to regulate this activity.