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Nonprofit Rating Agencies


An idea whose time has come.

When something necessary for one's general safety and well-being is difficult to properly obtain, the government is supposed to step in. This is one of the few principles upon which conservatives and liberals will generally agree.

This is why the military and the FDA, among other bodies, uncontroversially fall undert the purview of government.

Now that we've seen the kind of destruction misleading financial approvals can create -- in the form of AAA ratings that were never even close to being merited, models being changed to justify ratings after errors were discovered, and so on -- isn't it high time rating agencies fell under the same cover?

After all, we rely on government agencies to compile and analyze the economic data upon which trillion-dollar policies are based, and upon which the private market absolutely relies.

Wouldn't it make more sense for ratings to be developed by academic researchers paid out of a general pool, rather than by for-profit firms with a seemingly flagrant conflict of interest?

We are at an absolute crossroads now. We have the opportunity to remake a broken system. This is an example where a bigger, bolder step is called for.

Ask any trader. The ratings provided by the agencies are valued not for their analytic content - witness General Electric (GE), rated AAA but traded far weaker. Their value lies in their role as a much more general, and odious, cover for decision-makers who don't have the time or inclination to do their own homework. They exclaim, "How can you fire me for owning that - someone who gets paid to analyze it said it was the best possible credit!"

This is not to say that the ratings done by not-for-profit institutions would be perfect. They wouldn't. But the conflict of interest that taints Moody's (MCO), Standard and Poor's, and Fitch's would be mostly gone.

Another benefit would be a better laboratory setting for research, as opposed to pressure to hit quarterly earnings targets - a short-sighted view clearly at odds with good policy.

Lest this seem too radical, it should be pointed out that the National Association of Insurance Commissioners is working on this very concept for rating insurers.

Why not take this thinking to the next level?
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Position in GE, MCO

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