Competition Doesn’t Always Bring Out the Best

October 19, 2009 by · Leave a Comment
Filed under: The Rating Agencies 

The ratings agencies claim to have a firewall. They claim that those selling analyst services are unable to influence those doing the analyzing. There are probably some very well-intended people at the rating agencies who believe this to be true and no doubt they work very hard to ensure that it is true.

But human nature being what it is and the undeniable inclination to please people—particularly those who are paying you a lot of money—makes this arrangement suspect. It would be as though law firms hired the judges.

There are functions and industries that work very well using a competitive, market-based model. Unfortunately others, regardless of the number of regulations in place, simply don’t lend themselves to the motivations inherent in a for-profit business.

As much as we want to trust a rating agency’s firewall, we need to develop an industry-funded system to rate securities that is truly free of conflicts of interest.

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