SEC considers new alternative to credit ratings

An outline of the United States against dollars represents U.S. finances and money.


BOB MOON: The loud pop of the housing bubble called dramatic attention to misleadingly high ratings that got stamped on risky and bad home mortgages. Regulators are under orders from Congress to come up with alternatives to the ratings agencies. And they've taken up that task this week.

Let's turn to Marketplace's Nancy Marshall Genzer, live in Washington. Nancy, if these ratings are so questionable, why rely on them at all?


GENZER: Well actually Bob, there are government regulations that force funds to rely on them. For example, some funds in your 401K can only invest in things that have gotten a triple A rating from these agencies. Yesterday, the Securities and Exchange Commission proposed new rules that would reduce the reliance on rating agencies. Money market funds oculd actually rate investment themselves.

MOON: Well, letting fund managers rate their own investments would certainly reduce reliance on the rating agencies.

GENZER: True. But some people say that could make things worse -- they say funds might end up investing in riskier things. And they'd have to hire new analysts to rate investments, and investors could be stuck paying for those higher overhead costs. I talked to Howard Cure about this. He's a bond analyst at Evercore Wealth Management.

HOWARD CURE: They would have to, I don't know, double triple their staff, maybe even more, and that could potentially put a strain on the finances of these mutual funds.

The SEC is still open to other ideas. The rules published yesterday are just preliminary. Now there will be a period of public comment before final rules are issued. So, Bob, if you have any good ideas, tell the SEC.

MOON: I'll scratch my head. Nancy Marshall Genzer in Washington, thanks.

GENZER: You're welcome.

About the author

Nancy Marshall-Genzer is a senior reporter for Marketplace based in Washington, D.C. covering daily news.
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From your show: "

HOWARD CURE: They would have to, I don't know, double triple their staff, maybe even more, and that could potentially put a strain on the finances of these mutual funds."

True - and is that a bad thing? How many funds exist? Where did they all come from? How many are really needed to ensure a competitive market, and how many exist because of information inequities?

If the true cost of accurate information on risk and independent reporting (and some risk premium for error) was in place, we might lose some funds, but society benefits. Bad for the quants, good for us.

Information costs are often neglected by traditional economists as externalities. For once, we can let the market sort out which firms survive and which analysts are worth their salt.

This will be harder than it sounds to do. At the end of the day someone (actually many analysts) will have to get paid to rate investments. If the rating agencies don't then who?

Why don't we just add more accountability to the rating agencies? If they mess up, like they did in this housing fiasco, then make sure the legal framework is there to inflict financial pain on them as well?

They do not operate in a competitive environment so it is not enough to expect them to learn from their mistakes. Just as they are motivated to sell a product and make money they should be motivated to ensure that product is accurate.

Having the fox guard the hen house, great, just great......

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