Fallout: The Financial Crisis

Will reform bill change rating agencies?

Nancy Marshall-Genzer Apr 23, 2010
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Fallout: The Financial Crisis

Will reform bill change rating agencies?

Nancy Marshall-Genzer Apr 23, 2010
HTML EMBED:
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TEXT OF STORY

Kai Ryssdal: If you ran down the list of people or organizations who’ve been singled out for their role in the financial crisis, you could reasonably expect to see aggressive Wall Street bankers, absent federal regulators and regular folk who got in over their financial heads. Not usually on that list are the ratings agencies — Moody’s and Standard and Poor’s and Fitch’s. The ones that gave triple-A grades to bonds made of mortgages not worth the paper they were printed on. A congressional hearing today aimed to put those guys on that list.

Marketplace’s Nancy Marshall Genzer reports.


Nancy Marshall Genzer: Today’s hearing spotlighted glaring conflicts of interest. Democrat Carl Levin of Michigan said the credit rating agencies gave high ratings to risky investments. Levin says they didn’t want to lose business from the banks that created those investments and paid for the ratings.

Former Moody’s investment analyst Richard Michalek told senators that some banks refused to let him rate their investments.

Richard Michalek: There was a variety of complaints that I would be either too aggressive, too abrasive.

A Senate report says Moody’s and Standard & Poor’s used inaccurate rating models. Later, they created new, stricter models, but never applied them. Again, the report says, the rating agencies didn’t want to bite the hand of the bank that fed them. The financial reform legislation doesn’t address this problem.

Gerald Epstein wishes it would. He’s an economist at the University of Massachusetts, Amherst. He says the bill should require that credit rating agencies be paid indirectly.

Gerald Epstein: You could tax the banks, and then have a general fund that would pay the credit rating agencies.

Jim Allen [head of capital markets policy at CFA Institute] says he has a better idea. He helps accredit financial analysts. He says, right now, the government requires investors to use the ratings. Allen says change that and you take away the agencies’ captive market.

Jim Allen: Make it so they have to compete on the quality of their analyses and their continued monitoring of these instruments.

Allen says, then the rating agencies would cater more to investors. They may do that anyway. The financial reform bill lets investors to sue the rating agencies — for the first time.

In Washington, I’m Nancy Marshall Genzer for Marketplace.

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