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Poor Standards: 4 Steps to Ending the Rating "Agency" Racket

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from the Huffington Post

There's been a great deal of complaining today about Standard & Poor's downgrade of the U.S. government's creditworthiness, but the time for talking about credit rating agencies is long past. There are four steps that can be taken now to end the rating corporations' reign of error.

These "agencies" aren't government entities, but they derive great power from authority conferred by the government. Yet banks and other institutions are allowed to hire the "agency" that rates them.

Picture a situation where the IRS has been "privatized," and taxpayers are allowed to hire the accountants that will review their payments for accuracy. (I know -- I shouldn't give them ideas.) Everybody would hire the accountant that says they're due a huge refund, and pretty soon the entire system would collapse. That's not too different from the way the rating game works.

The moment for change was in 2008, when we learned of their key role the global financial crisis. But it's not too late to act now. Here's some background and a clear plan for ending the rating racket once and for all.

Bad Sheriffs

Is it fair to call them a "racket"? Merriam-Webster's definition of a "racket' includes "a usually illegitimate scheme made possible by bribery or intimidation," and "an easy and lucrative means of livelihood." Running a rating agency is certainly the latter. These highly profitable companies enjoy a near-monopoly status that's made possible only because the U.S. taxpayer, through its elected representatives, has given them enormous (and unearned power).

These for-profit companies received their biggest gift in 1975, when the SEC gave three of them -- Moody's, Standard & Poor's (S&P), and Fitch's -- the new designation of "nationally recognized statistical research organization," or "NRSRO." Since then, they've been able to use their NRSRO status in much the same way a drunken sheriff uses his badge in a spaghetti western -- to bully, intimidate, and cajole themselves into ever-greater positions of power and wealth.

They've been lecturing the U.S. government in a lordly manner for more than a year about the need to make drastic needs to social programs. But ironically (or not), much of the government's current financial problems -- and most of the public's problems -- are due to a financial crisis they helped make possible through incompetence and moral corruption.

To fully understand the damage these bad sheriffs caused, it's important to understand three things:

1) Federal, state, and local governments, as well as pension funds and other investors, relied on their "AAA" ratings to protect their savings.
2) They traded those AAA ratings to paying customers in return for more business.
3) 90% of the mortgage securities they rated "AAA" in 2007 were later downgraded to junk-bond status.

Oh, and a couple more things:

4) Nothing has changed. Key rating provisions of the Dodd/Frank bill have been delayed and deferred. Why?
5) Because lobbyists for the big three rating "agencies" have spent $1.76 million since January, mostly directed at Congress and regulators.

Poor Standards

Here's what can be found in hundreds of pages of internal "agency" documents released by the Senate last year:

When employees of Moody's were asked what four their highest job goals were, the top three answers were 1) generating more revenue, 2) increasing market share, and 3) good relationships with their customers. Performing high-quality analytical work made the lis ... in fourth place. Consultants who performed the survey wrote, "When asked about how business objectives were translated into day-to-day work, most agreed that writing deals was paramount, while writing research and developing new products and services received less emphasis. "

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Richard (RJ) Eskow is a former executive with experience in health care, benefits, and risk management, finance, and information technology. Richard worked for AIG and other insurance, risk management, and financial organizations. He was also a (more...)
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