Rating Agencies Threat to U.S. Economy?

Joshua M. Brown, a money manager for high net worth clients, charitable foundations, corporations and retirement plans, complained recently in a blog post for The Christian Science Monitor that rating agencies are threatening the still-fragile asset-backed securities market.

Moody’s Investment Services, Standard & Poor’s and Fitch Ratings, in reaction to the recently-passed Dodd-Frank law that overhauled U.S. financial regulation, would not allow their ratings to appear in bond registration statements. As a result, they effectively shut down the market selling new bundles of auto and consumer loans. The Security and Exchange Commission has since stepped in to untangle the situation.

Nonetheless, Mr. Brown accuses the agencies of cowardly and infantile behavior. He challenges that because the Federal Government would no longer shield the agencies from exposure to liability for their ratings “…they [the rating agencies] are taking their marbles and going home.

This is a cheap ad hominem attack by Mr. Brown. Unlimited liability would equal a rating premium equal to the par amount of the bonds. The rating agencies acted rationally.

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