It’s Time For Independence

The ratings agencies’ primary role is to serve as an independent and completely neutral evaluator of an investment’s risk. In the simplest sense, the agencies are the referees at the basketball game. And like the referees, their responsibility is to assure an honest and clean game for the thousands who have plunked down some hard earned cash and have “invested” in watching a game.

There are dozens of proposals being floated that are all meant to arrive at this independence without fundamentally changing the business model that has rating agencies being paid by the securities’ issuers. Possibly the most startling is a proposal to hold all ratings agencies jointly liable whenever any of them violate securities law—an effort to have them all police each other. It isn’t difficult to foresee the chaos—and litigation—that would quickly ensue.

Until you reverse the flow of money, until money flows from investors to the agencies — until the crowd or an independent third party pays the referees instead of the players — there can be no real confidence that this conflict of interest has been extinguished..