Wednesday, December 09, 2009
Between uncertainty over what to change and an unwillingness to impose serious reforms, Congress is expected to leave the credit ratings industry largely untouched, even though its role in the economic collapse was paramount. At the heart of the problem was, and still is, the fact that Wall Street is allowed to pay Moody’s Investors Service, Standard & Poor’s and Fitch Ratings for their ratings of bonds, which is not unlike restaurants paying critics for a good review, as The New York Times describes it. This payola system helped set up the financial collapse last year, thanks to the credit agencies’ approval of billions of dollars in risky securities held by banks and investment firms.
Despite the complicity of the credit raters, lawmakers have few ideas, or stomach, for drastically changing the way Moody’s, S&P and Fitch do business. “What you see in these bills are Botox shots,” Joseph A. Grundfest, a professor of securities law at Stanford Law School, told the Times. “For a little while, everyone is going to be frozen into a grin, and then the shots are going to wear off.”
Congress may adopt legislation increasing oversight of the credit rating agencies, requiring greater disclosure, and allowing more lawsuits. But the pay-for-approval system is expected to continue. Observers say lawmakers claim to be afraid to shake up the system too much for fear of derailing a still wobbly financial industry and making it that much harder for the economy to rebound. Others are skeptical of this explanation and believe that too many members of Congress are too beholden to the ratings agencies and to the companies they rate.
-Noel Brinkerhoff
Debt Raters Avoid Overhaul After Crisis (by David Segal, New York Times)
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